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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 000-25857
PERSISTENCE SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3138935
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $42.5 million as of February 28, 2001 based upon
the closing sale price on the Nasdaq National Market reported for such date of
$2.97 per share. Shares of Common Stock held by each officer and director and by
each person who owns 10% of more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
There were 19,921,369 shares of the registrant's Common Stock issued and
outstanding as of February 28, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the 2001 Annual Meeting of Stockholders to be held on June 7,
2001.
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We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. "Persistence," as well
as the logo for "Live Object Cache," are registered trademarks owned by us. We
have registrations pending for the use of our logo with "Persistence," as well
as "PowerTier," "Dynamai," and "The Engine for E-Commerce" are also trademarks
of ours. This annual report on Form 10-K also makes reference to trademarks and
trade names of other companies that belong to them.
PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Persistence is a leading provider of transactional application servers and
dynamic Web content acceleration servers -- software that processes transactions
between users and back-end computer systems in electronic commerce systems. By
caching data, or moving information stored in back-end computer systems closer
to users, our software dramatically reduces network traffic, resulting in both
better network performance and faster transaction processing. In addition,
PowerTier application servers implement Sun Microsystems' full Java 2 Platform,
Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or EJB)
standard to enable businesses to deploy sophisticated Java applications, which
readily scale, or accommodate rapidly increasing numbers of users. Our PowerTier
family of transactional application servers offers the speed, scalability and
reliability to enable the next generation of sophisticated, high-volume
electronic commerce applications. Our Dynamai Web content accelerator improves
the speed and scalability of electronic commerce Web sites that rely heavily on
dynamically generated content using technologies such as Java Server Pages and
Active Server Pages. Our major customers include AT&T, Boeing, Cisco, FedEx,
Fujitsu, Instinet, Intershop, iPIX, Lucent, Morgan Stanley Dean Witter,
Motorola, Network Commerce, Nokia, Salomon Smith Barney and Wells Fargo.
INDUSTRY BACKGROUND
The Internet has evolved into a global communications medium enabling
millions of people to share information and conduct business electronically. As
the Internet's popularity has increased, companies in industries ranging from
securities trading to book selling are extending their core business processes
over the Web to conduct electronic commerce with customers, suppliers and
partners. The growth of these electronic commerce offerings has led to
significant growth in the number of users and transactions conducted over the
Web.
While creating new business opportunities, the significant growth of
electronic commerce has also created tremendous technological challenges for
electronic commerce companies struggling to meet the needs of rapidly increasing
numbers of users. These companies are discovering that their existing Internet
software infrastructure is unable to support thousands of concurrent users or
process up to thousands of transactions per second. Even casual observers of the
Internet are familiar with these limitations, which include:
- Poor performance: Initial electronic commerce offerings were not designed
to scale to handle large numbers of users. Internet users accessing these
systems often experience lengthy delays as the number of concurrent users
increases.
- System failures: Initial electronic commerce offerings did not anticipate
the level of robustness required to operate 24 hours a day, 7 days a
week. Internet users accessing these systems at peak volume can
experience frequent system crashes.
- Limited adaptability: Initial electronic commerce offerings were built on
software infrastructures that offered only limited ability for
customization and personalization. To remain competitive, companies must
continuously enhance and differentiate their electronic commerce
offerings.
While these problems have been well-publicized in the business-to-consumer
market, we believe that business-to-business interactions face even more
pronounced problems due to the added complexity of
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managing transactions between multiple companies. In addition, we expect the
growth of the business-to-business electronic commerce market to outpace the
growth of the business-to-consumer market.
In large part, the problems facing these organizations, both in
business-to-business and business-to-consumer electronic commerce, are derived
from the continuing evolution and increasing sophistication of web-based
applications. In the early days of the Internet, organizations turned to the Web
for information publishing, decision support and simple transaction processing.
This first generation of web-based applications focused on extending legacy
applications to the Internet. These applications were typically not business-
critical, and had relatively simple interactions and limited functionality. The
web application server emerged as the infrastructure used to support these first
generation applications.
Today, use of the Web has changed dramatically as the Web has emerged as a
leading platform for conducting electronic commerce. The number of individuals
and organizations conducting transactions over the Internet has increased
significantly, as organizations have offered increasingly sophisticated and
feature-rich electronic commerce applications. At the same time, as
organizations have begun to conduct significant volumes of business over the
Internet, system failures and delays in transaction processing have ceased to be
mere inconveniences and have become serious impediments to doing business. To
achieve a competitive advantage in today's environment, many businesses are
looking to create web-based electronic commerce offerings that are available 24
hours per day, 7 days per week and that enhance customer loyalty by leveraging
partner, supplier and third party relationships. Complicating these challenges
further is the need to rapidly develop and deploy these applications on
"Internet time."
As the Internet has evolved into a critical business platform, the
limitations of the software infrastructure used to support electronic commerce
have become apparent. The first generation web application servers were not
designed to accommodate the high transaction volumes and high performance
requirements that characterize electronic commerce today.
The next generation of electronic commerce will require a fundamentally new
software infrastructure, based on an application server platform optimized for
high volume transaction processing over the Internet. The platform must provide:
- Real-time scalability: accommodate up to thousands of end users with
consistent sub-second response times;
- High availability: handle system failures without interruption and
without losing critical information for potentially thousands of
concurrent users;
- Rapid adaptability: allow companies to continuously improve their
business processing through automated development and management of
differentiated electronic commerce offerings; and
- Business-to-business integration: enable businesses to extend their
processing across organizational boundaries.
PERSISTENCE SOLUTION
Our PowerTier and Dynamai family of products consists of transactional
application servers that are specifically designed to enable high volume, high
performance electronic commerce applications. Our products, PowerTier for EJB,
PowerTier for C++ and Dynamai, address the scalability, availability and
adaptability demands that typically occur when delivering business solutions
over the Internet. Our products offer the following key benefits:
Real-Time Response for Thousands of Concurrent Users. Our PowerTier and
Dynamai products were designed specifically to accommodate high volume
transaction processing and the data integrity requirements of distributed
applications. Both PowerTier and Dynamai utilize caching technology. Caching is
a process in which data is pulled out of back-end systems and into the server
cache, which allows the data to be shared and manipulated by multiple users.
Replication between PowerTier server caches using the PowerSync feature allows a
cluster of PowerTier servers to provide highly scalable performance as the
number of users increases. Dynamai is designed to use a similar clustering
scheme to enable successful cooperation among multiple
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caches. This architecture helps reduce the work load on back-end systems and
accelerates application performance. The effect of this architecture is to
minimize unnecessary network traffic and thereby enable high performance and
reliability even with significant transaction volumes. We believe that both our
PowerTierand Dynamai products offer superior performance and scalability to
support the deployment of large-scale electronic commerce applications.
Dramatic Reductions In Time-to-Market for Electronic Commerce
Applications. Our PowerTier platform decreases time to market and development
cycles for sophisticated electronic commerce applications due to our proprietary
and patented object-to-relational mapping technology. This technology enables
the automatic generation of software code, which minimizes basic, low-level
programming tasks, such as security and database access. The PowerTier platform
accelerates development by giving developers access to data in a familiar way,
as software components, and provides application developers with a framework to
rapidly build electronic commerce applications. Similarly, the Dynamai product
enhances the performance and scalability of Web-based systems through a
relatively simple cache configuration process, which does not require costly
re-architecture of existing back-end systems.
Protects and Leverages Existing Information Technology Investments. The
PowerTier platform enables developers to build new electronic commerce
applications while simultaneously integrating existing back-end systems.
PowerTier's flexible architecture integrates with disparate database servers,
web servers and multiple clients, while supporting multiple programming
languages and computing platforms. PowerTier provides enhanced flexibility and
interoperability to link existing enterprise applications and systems, allowing
businesses to leverage their investments in information technology and extend
them over the Internet. Similarly, the Dynamai product is designed to provide
its benefits with minimal disruption of existing information technology
investments.
Leadership in Emerging Standards. Customers are increasingly seeking open,
standards-based technology solutions that enable them to develop and implement
new applications rapidly. Our PowerTier for EJB products provide application
server solutions that support the J2EE specification to enable businesses to
deploy high performance, scalable Java applications for the enterprise. We
worked with the Sun Microsystems consortium to define an industry-wide component
standard to be used when building enterprise applications with the Java
language. It is this standard upon which our PowerTier platform is built, and we
believe that this emerging platform has the potential to dramatically simplify
the development of distributed, multi-tier electronic commerce applications. Sun
introduced the Java 2 Platform, Enterprise Edition (J2EE) in 1999, which is a
suite of enterprise Java technology specifications. Persistence became one of
Sun's first J2EE licensees, and we intend to continue to be a leading adopter
and contributor to these technologies as they evolve.
Optimized Platform For Business-to-Business Electronic Commerce. Our
transactional application server is designed and optimized to enable complex
online transactions, providing the necessary scalable, reliable and secure
infrastructure. Platforms designed to support the next generation of
business-to-business electronic commerce applications must handle hundreds and
potentially thousands of concurrent users while simultaneously providing
reliability and security, and enabling connections to a myriad of existing and
emerging back-end applications. In addition, we believe our PowerTier products
are particularly well suited for multi-party, multi-step business-to-business
transactions that require server-to-server communication.
PERSISTENCE STRATEGY
Our objective is to become a leading provider of transactional application
server software and dynamic Web content acceleration products that comprise the
Internet software infrastructure for high volume, high performance electronic
commerce applications. To achieve this goal, we intend to:
Increase Partnerships With OEM and Reseller Partners. We intend to continue
to develop and expand relationships with OEM and reseller partners. We believe
these third parties can effectively market our products, particularly Dynamai,
through their existing relationships with our target market customers. We
believe that these relationships will provide additional marketing and sales
channels for our products and
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facilitate the successful deployment of customer applications. We are currently
working with multiple OEM and reseller partners, including Intel, with whom we
announced a reseller agreement in February 2001.
Capture Market Share in the Emerging Business-to-Business Electronic
Commerce Market. We intend to become a market leader in providing software
infrastructure to enable sophisticated business-to-business electronic commerce
applications. To achieve this objective, we will continue to make investments in
building our sales and marketing organizations by shifting to a greater focus on
our indirect sales channels. We continue to launch a variety of sales and
marketing programs designed to capture market share. We will continue to
collaborate with our innovative and advanced customers to develop and deliver
product features that address their needs. We believe that this collaboration
focuses our overall product development effort and speeds our time-to-market.
Extend Technology Leadership Position in Standards-Based Platforms for Next
Generation Electronic Commerce. We intend to extend our technology leadership in
the transactional application server and dynamic Web content acceleration
markets by enhancing our underlying technology to offer real-time scalability,
high availability and rapid adaptability for the next generation of electronic
commerce applications. To achieve this objective, we will continue to make
investments in our research and development organization. In addition, we intend
to be a leader in the definition and adoption of emerging technology standards,
such as J2EE, which we believe have the potential to dramatically simplify the
development of distributed, multi-tier applications. We have been a pioneer in
the areas of caching and object-relational mapping, and hold several patents on
core technologies. We intend to continue to innovate and create new enabling
technologies for electronic commerce.
Expand Product Platform to Offer Complementary Solutions. In addition to
extending our technology leadership, we intend to broaden and enhance our
product platform to incorporate complementary solutions for developing and
deploying sophisticated electronic commerce applications. We will continue to
make investments in our research and development organization for many of these
product initiatives. We will also consider, from time to time, bolstering these
internal efforts with strategic acquisitions. For example, we have recently
licensed real-time client notification technology, which provides the client
notification infrastructure through updates of server-side information resources
that are processed and routed to clients of the PowerTier for EJB application
server. The addition of these complementary technologies will enable us to offer
a more complete platform for our customers.
Leverage Installed Customer Base. We believe that there are significant
opportunities to expand the use of our products throughout our current customer
base. Although most organizations initially deploy our products on a
departmental or pilot basis, we believe that initial customer success with these
deployments may lead to significant opportunities for enterprise-wide adoption.
Further, we believe that most companies, including our customers, are just
beginning to fully capitalize on the opportunities created by the Web. As these
companies increasingly migrate their core business processes to the Web, we
believe they will need additional licenses of our software to support and enable
their new electronic commerce applications.
Strengthen International Presence. We believe there are significant
international opportunities for our products and services, in particular, in
Europe and Asia. Currently, we have established direct sales operations in the
United Kingdom, Germany, Hong Kong and Shanghai. In addition to our direct sales
operations, we also distribute our products throughout Europe and Asia with
distributors and systems integrators. We intend to extend these international
third-party distributor and systems integrator relationships.
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PRODUCTS
Our PowerTier platform is a family of transactional application server
products that deliver scalability, high availability and rapid adaptability for
high volume, high performance electronic commerce applications. Our current
product line consists of PowerTier for EJB, which was released in 1998, and
PowerTier for C++, which was released in 1997. The following table describes the
major features and benefits of our PowerTier platform.
PRODUCT FEATURES BENEFITS
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POWERTIER FOR EJB Shared transactional object cache Enables real-time scalability by reducing
database traffic
Application server cache Synchronization Allows cooperative processing across
organizational boundaries
Application server failover Delivers high availability by replicating
information across clusters of application
server caches
PowerPage Enhances developer productivity
Integrated end-to-end systems, including: Delivers out of box productivity and an
- Servlets end-to-end development and deployment
- Web server platform
- XML server
- EJB server
EJB 1.1-compliant security encryption Simplifies developer inclusion of encryption
Support for J2EE standard Protects customers' IT investments as a
result of open solution
POWERTIER FOR C++ Shared transactional object cache Enables real-time scalability by reducing
database traffic
Application server cache Synchronization Allows cooperative processing across
organizational boundaries
Application server failover Delivers high availability by replicating
information across clusters of application
server caches
Support for CORBA standard Protects customers' IT investments as a
result of open solution
PowerTier for EJB
Our PowerTier for EJB application server platform incorporates our patented
technologies into one of the few J2EE-based transactional application servers.
The EJB and J2EE standards, as defined by the Java Software division of Sun
Microsystems, are gaining rapid acceptance as a programming language for complex
enterprise applications. J2EE provides a consistent way to program and integrate
services for companies building distributed business-to-business applications
with the Java programming language.
The EJB standard specifies container-managed persistent objects, which
automate the mapping between EJB components and relational database tables. This
feature allows programmers to build complex applications quickly by making
relational data look like software components, which can be easily manipulated.
We worked with the Sun Microsystems consortium to help define the initial EJB
standard, and we continue to contribute to new versions of the EJB standard. Our
PowerTier for EJB platform now runs on the Windows NT and multiple varieties of
the Unix operating systems.
Our latest version of PowerTier for EJB, PowerTier 6 with PowerPage, is
designed to simplify the complex task of developing high performance, scalable
web applications and eliminate the need to compromise between powerful
application servers and simplicity of web page creation. The PowerTier 6
application server is designed to have an end-to-end J2EE development platform
that enhances development team productivity and allows scalable, flexible
applications to be rolled out at internet speed.
PowerPage is designed to give web developers a head start by providing them
with a pre-built HTML framework from which to work, as well as an EJB-based
back-end for maintainability and scalability. PowerPage is also designed to
automatically generate Java Server Pages (JSPs), which provide the interface
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between the browser and the EJB server. The end result of the design is to have
dynamic HTML pages with access to EJBs, thus greatly reducing the manual coding
of hundreds of lines required for a distributed application.
PowerTier 6 also:
- Is designed to be security compliant with Sun's EJB 1.1 specification,
providing integrated and comprehensive authorization, authentication and
encryption capability for new applications
- Includes an enterprise class Servlet Engine tightly integrated with
PowerTier 6, with support for Java servlets and JSPs. The Servlet Engine
is designed to be scalable and fault tolerant.
PowerTier for C++
Our PowerTier for C++ product is a high-performance transactional
application server platform, which is based on our patented technologies and the
Common Object Request Broker Architecture, or CORBA, standard for communication
between distributed applications. The CORBA standard is managed by an industry
group called the Object Management Group, of which we are a contributing member.
We are also one of the authors, along with Oracle, IBM and others, of an
emerging component of the overall CORBA standard, called the Persistent State
Service specification. Our PowerTier for C++ platform runs on the Windows NT and
Unix operating systems. We have licensed the J2EE platform and are a contributor
to the Java standard. Patented Technology Platform
Our application server cache software architecture and cache replication
technology have been designed to serve as the foundation for a variety of
scalable electronic commerce applications.
- Shared Caching. Our cache technology is the foundation for the high
performance characteristics of our transactional application server. To
maximize performance, dynamic information such as product inventory data
is retrieved from a database into the application server cache. This
in-memory information may be accessed simultaneously by multiple users,
saving each user from having to access a disk-based database for that
information. This feature reduces network traffic between the application
server and the database, delivering higher performance.
- Transactional Caching. To enable users to get a consistent view of
information within the shared cache, our technology prevents one user
from seeing uncommitted changes made by another user. The ability of our
shared application server cache to isolate users from dynamic changes to
component information, such as inventory data, differentiates our
application server cache from other caching technologies which can only
manage static information, such as web pages. This feature allows high
performance caching of dynamic or transactional information.
- Cache Replication. Our cache replication technology provides the
foundation for the scalability, stateful availability and fault tolerance
of our transactional application server. We define stateful availability
as a system that can transfer a user in the middle of a complex business
operation, such as a portfolio valuation, from one application server to
another without interruption or losing business state, such as the user's
portfolio information. To provide stateful scalability, information from
one application server cache can be synchronized with information in one
or more other application server caches. Companies can deploy additional
replicated application server caches to increase their ability to support
more users, allowing them to use several smaller computers to do the work
of one larger and more expensive computer. Users' requests are
automatically routed to the application server with the most free
capacity, enabling high performance, notwithstanding increases in user
volumes. In the event of an application server failure, that application
server's responsibilities are automatically reassigned to another
application server, improving system availability.
- Cluster Management. We have developed complementary, proprietary
administration software, which enables remote administration for clusters
of application servers, reducing both administrative costs and the
possibility of error. This management software also enables centralized
monitoring, via a
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standard web browser, of the cluster through any individual application
server. This feature contributes to greater system availability and
reduced administrative costs.
- Development Automation. Our PowerTier development environment includes
frameworks to automate or eliminate many development tasks. The
proprietary and patented object-relational mapping feature automatically
generates the software code to translate software components into
relational databases. This feature reduces the programming time required
to build enterprise applications. The PowerTier application server
includes pre-built software services for data management, transaction
management and communications, relieving the developer from having to
build these services from scratch.
- Standards-based. The PowerTier application server platform uses an open
architecture that is based on industry standards such as Java, C++,
CORBA, Windows NT, UNIX, SQL, J2EE, EJB and others.
Dynamai
Our Dynamai Web content accelerator improves the speed and scalability of
electronic commerce Web sites that rely heavily on dynamically generated content
using technologies such as Java Server Pages and Active Server Pages. The
Dynamai product was released in 2000. The following table describes the major
features and benefits of Dynamai.
PRODUCT FEATURES BENEFITS
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Dynamai Dynamic Web object cache Enables real-time scalability by
reducing application server and
database workload
Event-based content invalidation Supports maintenance of "fresh'
information in cache
Automatic cache clustering Delivers high availability by
replicating information across
clusters of application server
caches
On-the-fly content adaptation Allows caching of personalized
content
We believe that research and product development will be a key to our
success as a leader in the transactional application server and dynamic Web
content acceleration markets. Our research and development expenditures totaled
$8.1 million for 2000, $6.4 million for 1999, and $4.2 million for 1998.
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CUSTOMERS
Our software products are licensed to customers worldwide for use in a wide
range of electronic commerce applications, including real-time electronic
trading, supply chain management, internet network management, application
outsourcing and customer relationship management. The following table lists a
representative selection of customers who have purchased our products.
E-COMMERCE/INTERNET FINANCIAL SERVICES/EXCHANGES
budget.com Capital Group
Cisco Systems* Capital One Financial
Computer Science Corp. CNP Assurances*
DiCarta Credit Suisse First Boston*
Fujitsu* Cyberslotz
Globe ID Software Instinet*
Imind* JP Morgan
Internet Pro Kinetech Services
Intershop* Morgan Stanley Dean Witter*
Mercata Nike Securities
NBC Internet Norwest*
Netscape Wofex
Network Appliance Solomon Smith Barney*
Nexus Limited Corp* Zurich Arippina Gruppe
Object Space
Open Environment TRANSPORTATION & LOGISTICS
Persistence E Solutions Air Canada
Pipeline Software Air France
Rightworks* Executive Jet
ShopNow.com* FedEx*
Smallworld.com Hekimian Laboratories
Systemax Sabre Group Holdings (American Airlines)
Systemhaus der ABC PrivateKunde Transquest Information (Delta Airlines)*
TurstTheDJ.com WorldRes.com
Uyisys
4T Solutions MANUFACTURING & DISTRIBUTION
Asea Brown Boveri Power T&D
COMMUNICATIONS Boeing
AT&T Enron
Bell Atlantic IBM*
BellCore* Nippon Steel*
BellSouth Non-Stop Solutions
Bull Ingenerie (France Telecom) Perkin-Elmer*
CellularOne Group Raytheon
Cross Keys Systems SuperValu*
CSC Holdings (Cablevision)* Titan Systems
Lucent Technologies* Xerox
Motorola*
Nextel OTHER
Nokia* Caldwell-Spartin
Qualcomm Convergy Information*
Scientific-Atlanta Fermi National Accelerator Laboratory
Sequel Systems National Aeronautics and Space
Sprint Administration
Telstra (Australia)
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* Denotes customers who have ordered at least $500,000 in products.
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In 2000, sales of products and services to Salomon Smith Barney accounted
for 16% of our total revenues. In 1999, sales of products and services to Cisco
accounted for 13% of our total revenues. In 1998, sales of software licenses to
Cisco accounted for 14% of total revenues, and sales of software licenses to
Instinet accounted for 17% of total revenues.
The following case studies illustrate how selected customers have used our
products to address their electronic commerce and core business application
needs. These case studies are based on information supplied by these customers,
however we believe the information is accurate in all material respects.
Reuters, the parent of Instinet, and Cisco are both stockholders in our company.
Real-Time Electronic Trading Network
Instinet Corporation. Instinet is the world's largest electronic agency
broker in equity securities. Historically, trading in fixed income securities
occurred almost exclusively over the telephone. Instinet revolutionized this
telephone-based fixed income trading with a global electronic broker trading
service for fixed income dealers that can accommodate up to 1,000 transactions
per second. It has designed a system that was just brought live in the U.S.,
which is expected to use hundreds of replicated PowerTier application servers
operating in concert when fully deployed to meet the performance and scalability
requirements of its electronic fixed income broker service. In 1998, sales of
software licenses to Instinet accounted for 17% of total revenues.
Intranet Supply Chain Management
Federal Express Corporation. The world's largest express transportation
company, FedEx transports more than three million items to over 200 countries
each business day, using a fleet of more than 620 aircraft and 44,000 vehicles.
In its effort to improve on-time deliveries, FedEx has built a global operations
center to monitor and control the movement of shipments worldwide. The global
operations center functions as the nerve center of the FedEx transportation
system, handling daily occurrences including changing flight schedules,
emergency maintenance, inclement weather and excess package volumes. Because the
company's existing mainframe systems lacked the required flexibility and
performance, FedEx turned to us for help in building a high performance intranet
system. By managing complex flight schedule information from multiple data
sources within a PowerTier application server cache, the global operations
center can provide real-time contingency plans, enabling FedEx to provide
consistently high on-time package delivery rates and superior customer service.
FedEx estimates that, using the PowerTier development environment, it has been
able to significantly reduce development time for new system functionality
compared to development in its traditional mainframe environment.
Internet Service Provider Network Management
Cisco Systems, Inc. A worldwide leader in networking for the Internet,
Cisco Systems is committed to delivering hardware and software solutions that
enable Service Providers to meet the rapid growth of the Internet. The Cisco
Service Management System, or CSM, gives Service Providers sophisticated tools
to automate time-consuming network management tasks. For this system, Cisco
required a highly scalable, standards-based application server platform for
deploying network management applications for managed business services such as
virtual private networks, Internet telephony and electronic commerce. To meet
these requirements, Cisco chose the PowerTier platform. For the Cisco IP Manager
product within the CSM system, PowerTier application server caching enables
real-time simulation of network configuration changes, preventing costly network
outages. The PowerTier development environment also enables Cisco to create a
common component framework that can be reused to reduce development time for
future CSM network services. In 1999, sales of products and services to Cisco
accounted for 13% of our total revenues, and in 1998, sales of software licenses
to Cisco accounted for 14% of total revenues.
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Application Outsourcing over the Internet
Celera Genomics. Celera provides gene discovery and characterization
services for drug discovery and development. Celera's GeneTag technology is a
novel gene expression analysis method that enables pharmaceutical companies to
develop new and potentially life-saving drugs by discovering and monitoring
genes involved in disease. Celera's BioScope software application allows
customers to access their data securely and remotely over the Internet. To allow
clients to quickly analyze and view the GeneTag results, Celera needed a
sophisticated software platform that could process hundreds of thousands of gene
expression comparisons while avoiding data bottlenecks. Celera selected
PowerTier to achieve these goals. The BioScope application utilizes the
PowerTier application server cache for high volume data analysis. With the
PowerTier development environment, Celera has been able to use both the Java and
C++ languages to deliver the BioScope software application in only four months.
Dynamic Visual Content Delivery over the Internet
Internet Pictures Corporation. IPIX is a leader in delivering dynamic
visual content for the Internet. Its technology is used by several of the
Internet's most popular brands, such as eBay, Yahoo! and Realtor.com. iPIX's
Virtual Tours for real estate are the daily destination for hundreds of
thousands of real estate buyers and sellers worldwide. These tours allow
potential buyers to view immersive 360-degree tours of properties at their
leisure. IPIX chose Dynamai to speed up the performance of its back-end servers,
handle traffic spikes gracefully and reduce the cost of building out its
infrastructure to support a growing customer base. They were able to put Dynamai
into production in a matter of days, achieving a 35x improvement in site
scalability with almost no changes to their existing infrastructure.
SALES AND MARKETING
We sell our products through both a direct sales force and third party
distributors. As of December 31, 2000, we had 68 people in our sales and
marketing organization, of which 41 were in the United States, 18 were in
European offices, and 9 were in our Asian offices. To support the complex
enterprise nature of our sales, our direct sales force is organized into
two-member teams of one sales representative and one sales engineer. We intend
to increase the size of our sales force focused on indirect distribution
channels.
Our sales cycle is relatively long, generally between three and nine
months. A successful sales cycle typically includes presentations to both
business and technical decision makers, as well as a limited pilot program to
establish technical fit.
We have engaged in, and may engage in a variety of targeted marketing
activities, including focused advertising, public relations, seminars, trade
shows and customer-oriented web site management. We have also made substantial
marketing investments in education and training for the EJB and C++ markets. We
hold periodic seminars in order to train developers in the EJB community. Our
web site allows developers to download a demonstration version of our products.
We intend to continue to develop and expand relationships with OEM and
reseller partners. We believe these third parties can effectively market our
products, particularly Dynamai, through their existing relationships with our
target market customers. We believe that these relationships will provide
additional marketing and sales channels for our products and facilitate the
successful deployment of customer applications. We are currently working with
multiple OEM and reseller partners, including Intel, with whom we announced a
reseller agreement in February 2001.
In international markets, we plan to expand our sales through indirect
channels, such as distributors and original equipment manufacturers. As of
December 31, 2000, we were represented by seven international distributors, who
sell our products in Europe, Asia and Latin America.
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COMPETITION
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
- performance, including scalability, integrity and availability;
- ability to provide a complete software platform;
- flexibility;
- use of standards-based technology;
- ease of integration with customers' existing enterprise systems;
- ease and speed of implementation;
- quality of support and service;
- security;
- company reputation; and
- price.
Our competitors for both PowerTier and Dynamai include both publicly and
privately-held enterprises, including BEA Systems (WebLogic), Secant
Technologies, IBM (WebSphere), Oracle (OAS) and Sun Microsystems (iPlanet). Many
customers may not be willing to purchase our PowerTier or Dynamai products
because they have already invested heavily in databases and other enterprise
software components offered by these competing companies. Many of these
competitors have pre-existing customer relationships, longer operating
histories, greater financial, technical, marketing and other resources, greater
name recognition and larger installed bases of customers than we do. In
addition, some competitors offer products that are less complex than our
PowerTier products and require less customization to implement with potential
customers' existing systems. Thus, potential customers engaged in simpler
business-to-business e-commerce transactions may prefer these "plug-and-play"
products to our more complex offerings. Moreover, there are other very large and
established companies, including Microsoft, who offer alternative solutions and
are thus indirect competitors. Further, dozens of companies have announced their
intention to support EJB/J2EE and may compete against us in the future. These
competitors and potential competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
we can. See also "Risk Factors -- Because we compete with Sun Microsystems, who
controls the EJB/J2EE standard, we face the risk that they may develop this
standard to favor their own products" and "-- Microsoft has established a
competing application server standard, which could diminish the market potential
for our products if it gains widespread acceptance."
In addition, in the PowerTier for C++ market, many potential customers
build their own custom application servers, so we effectively compete against
our potential customers' internal information technology departments.
In the Dynamai market, similar dynamic Web content acceleration technology
is available from a variety of sources, including but not limited to internal
development, application server vendors such as Oracle, electronic commerce
software vendors such as Intershop and ATG, content delivery networks such as
Akamai and epicRealm, and emerging software and hardware appliance vendors such
as Chutney and Cachier, who are directly targeting Dynamai's market.
INTELLECTUAL PROPERTY RIGHTS
Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If we are not adequately
protected, our competitors can use the intellectual property
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that we have developed to enhance their products and services, which would harm
our business. We rely on a combination of patents, copyright and trademark laws,
trade secrets, confidentiality provisions and other contractual provisions to
protect our proprietary rights, but these legal means afford only limited
protection. As of February 28, 2001, we had five issued United States patents
and two pending United States patent applications with allowable subject matter.
Despite any measures taken to protect our intellectual property, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. In addition, the laws of some foreign
countries may not protect our proprietary rights as fully as do the laws of the
United States. Thus, the measures we are taking to protect our proprietary
rights in the United States and abroad may not be adequate. Finally, our
competitors may independently develop similar technologies.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. As the number of
entrants into our market increases, the possibility of an intellectual property
claim against us grows. For example, we may be inadvertently infringing a patent
of which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
In March 1998, we entered into a license agreement with Sun Microsystems,
pursuant to which we granted Sun Microsystems rights to manufacture and sell, by
itself and not jointly with others, products under a number of our patents and
Sun Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell competing products that would, in
the absence of this license agreement, infringe our patents. Under this
agreement, Sun Microsystems made a one-time payment to us. Neither Sun
Microsystems nor we can transfer the license without the consent of the other
party.
EMPLOYEES
As of December 31, 2000, we had 152 full-time employees, including 68 in
sales and marketing, 51 in research and development, 12 in professional services
and 21 in general and administrative functions. Our relationships with our
employees are generally good. From time to time, we also employ independent
contractors to support our sales and marketing, research and development,
professional services and administrative organizations.
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EXECUTIVE OFFICERS
The following table sets forth specific information regarding our executive
officers as of February 28, 2001:
NAME AGE POSITION
---- --- --------
Christopher T. Keene.... 40 Chairman of the Board of Directors and Chief Executive
Officer
James H. Barton......... 37 Vice President of Strategic Technology and Chief Technology
Officer
Derek Henninger......... 38 Vice President of Engineering
Mark Palmer............. 51 Senior Vice President of Worldwide Field Operations
Christine Russell....... 51 Chief Financial Officer and Secretary
Each executive officer serves at the sole discretion of the Board of
Directors.
Christopher T. Keene co-founded Persistence and has served as Chief
Executive Officer and a director since June 1991 and as Chairman of the Board
since April 1999. From June 1991 to April 1999, Mr. Keene also served as
President. Before founding Persistence, Mr. Keene was a Manager at McKinsey &
Co., a management consulting firm, from July 1987 to June 1991. Mr. Keene holds
a B.S. degree in Mathematical Sciences with honors from Stanford University and
an M.B.A. degree from The Wharton School at the University of Pennsylvania.
James H. Barton has served as Vice President of Strategic Technology and
Chief Technology Officer since February 2000, as Director of Strategic
Technology from November 1999 to February 2000, and as Senior Field Engineer
from October 1997, when he joined Persistence, to November 1999. From June 1996
to October 1997, Mr. Barton was Director of Internet Products and Services for
Applied Reasoning Systems, an information technology company. From July 1994 to
June 1996, he was a Senior Systems Engineer with ParcPlace Systems, a pioneering
company in distributed object technology. Previously, he held field engineering
positions at information technology companies Object Design, Rational Software,
and IBM. Mr. Barton holds a B.S. degree in Electrical Engineering from Tennessee
Technological University, an M.S. degree in Computer Engineering from Carnegie
Mellon University, and an M.B.A. degree from the University of Maryland.
Derek Henninger co-founded Persistence and has served as Vice President of
Engineering since June 1991. Previously, Mr. Henninger worked as a senior
software engineer in the Data Interpretation Division of Metaphor Corporation, a
software and hardware company, from September 1990 to June 1991. Mr. Henninger
holds a B.A. degree in Economics and a B.S. degree in Computer Science and
Mathematics from the University of California at Davis.
Mark Palmer joined Persistence in June 2000 as Senior Vice President of
Worldwide Field Operations. He leads the company's global sales organization.
From April 1999 through June 2000 Mr. Palmer was on a personal sabbatical. From
May 1994 to April 1999, Mr. Palmer has served as President and Chief Executive
Officer of TriMark Technologies, a company that designed insurance industry
software. Earlier in his career, Mr. Palmer managed sales operations at Sun
Microsystems, a leading hardware and software company, where he helped
reengineer an alternate distribution channel. Mr. Palmer held senior level sales
and executive management positions in various software companies including
Inforex and Data General Corporation.
Christine Russell joined Persistence in October 1997 and has served as
Chief Financial Officer and Secretary since December 1997. Previously, she
served as Chief Financial Officer for Cygnus Solutions, an open source platform
software company, from October 1995 to October 1997. From April 1992 to October
1995, Ms. Russell served as Chief Financial Officer of Valence Technology, a
developer of lithium polymer batteries. Previously, she served as Chief
Financial Officer at Covalent Technologies, Inc., a vertical software company,
as Vice President of Finance of Stellar Systems, Inc. a security software and
hardware company, and as Corporate Controller of Shugart Corporation, a
subsidiary of Xerox. She holds a B.A. degree in English Literature and an M.B.A.
degree from Santa Clara University.
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ITEM 2. PROPERTIES.
We are headquartered in San Mateo, California, where we lease approximately
22,000 square feet of office space under a lease expiring on June 30, 2002. We
have an engineering staff facility in San Diego, where we lease approximately
6,000 square feet of office space under a lease expiring on August 31, 2004. We
also maintain sales offices in various U.S. states, the United Kingdom, Germany,
Hong Kong and Shanghai. We believe that our existing facilities are adequate to
meet our current and foreseeable requirements or that suitable additional or
substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings. We may,
however, from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK. Our Common Stock has been traded on the Nasdaq
National Market under the symbol PRSW since the effective date of our initial
public offering on June 24, 1999. Prior to the initial public offering, no
public market existed for our Common Stock. The price per share reflected in the
table below represents the range of low and high closing sale prices for our
Common Stock as reported in the Nasdaq National Market for the periods
indicated.
HIGH LOW
------ ------
For The Year Ended December 31, 1999:
Second Quarter from June 24, 1999........................ $13.81 $11.00
Third Quarter............................................ $28.88 $12.63
Fourth Quarter........................................... $26.06 $ 8.25
For The Year Ended December 31, 2000:
First Quarter............................................ $23.63 $15.81
Second Quarter........................................... $21.38 $10.13
Third Quarter............................................ $20.75 $ 9.91
Fourth Quarter........................................... $12.00 $ 3.38
We had 177 stockholders of record as of February 28, 2001, including
several holders who are nominees for an undetermined number of beneficial
owners.
DIVIDEND POLICY. We have never paid dividends on our common stock or
preferred stock. We currently intend to retain any future earnings to fund the
development of our business. Therefore, we do not currently anticipate declaring
or paying dividends in the foreseeable future. In addition, our line of credit
agreement prohibits us from paying dividends.
USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. Our registration
statement on Form S-1, SEC File No. 333-76867, for our initial public offering
of common stock became effective on June 24, 1999. We registered and sold an
aggregate of 3,450,000 shares of common stock under the registration statement
at a per share price of $11.00. Our underwriters were BancBoston Robertson
Stephens, U.S. Bancorp Piper Jaffray, and Soundview Technology Group. Offering
proceeds, net of aggregate underwriting commissions and discounts of $2.7
million and other offering transaction expenses of $1.1 million, were $34.1
million. None of the underwriting commissions and discounts or other offering
transaction expenses were direct or indirect payments to our directors,
officers, or holders of 10% or more of our stock. From June 24, 1999 through
December 31, 2000, we have used the net offering proceeds as follows:
Working capital expenditures................................ $12.6 million
Acquiring property and equipment............................ 2.2 million
Acquiring technologies...................................... 2.9 million
-------------
17.7 million
Investing in short-term, investment grade, interest-bearing
securities................................................ 16.4 million
-------------
$34.1 million
=============
Each of the above amounts represents our best estimate of our use of the
net proceeds. None of the net offering proceeds were paid directly or indirectly
to our directors, officers, or holders of 10% or more of our stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this report on Form 10-K. The
consolidated statements of operations data for the years ended December 31,
2000, 1999 and 1998, and the consolidated balance sheet data at December 31,
2000, and 1999, are derived from audited consolidated financial statements
included elsewhere in this report on Form 10-K. The consolidated statements of
operations data for the years ended December 31, 1997 and 1996, and the
consolidated balance sheet data as of December 31, 1998, 1997 and 1996 are
derived from audited financial statements not included in this report on Form
10-K.
YEARS ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License.......................................... $17,684 $10,890 $ 7,478 $3,546 $2,603
Service.......................................... 7,593 3,553 2,682 1,867 1,171
------- ------- ------- ------ ------
Total revenues........................... $25,277 $14,443 $10,160 $5,413 $3,774
Loss from operations............................... (17,857) (12,165) (4,090) (4,686) (3,345)
Net loss........................................... (16,726) (11,306) (4,089) (4,674) (3,311)
======= ======= ======= ====== ======
Basic and diluted net loss per share(1)............ $ (0.87) $ (0.86) $ (0.59) $(0.73) $(0.54)
======= ======= ======= ====== ======
Shares used in basic and diluted net loss per share
calculation...................................... 19,330 13,091 6,879 6,366 6,135
======= ======= ======= ====== ======
Pro forma basic and diluted net loss per
share(2)......................................... $ (0.68) $ (0.31)
======= =======
Shares used in pro forma basic and diluted net loss
per share calculation............................ 16,674 13,183
======= =======
AS OF DECEMBER 31,
--------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------ ------ ------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments... $19,490 $29,652 $4,938 $2,610 $4,535
Working capital..................................... 17,289 29,582 3,384 1,604 4,437
Total assets........................................ 33,641 39,092 7,064 5,447 6,478
Long-term obligations............................... 932 354 714 419 528
Total stockholders' equity.......................... 22,556 32,018 3,422 2,057 4,697
- ---------------
(1) Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted
net loss per common share was the same as basic net loss per common share
for all periods presented since the effect of any potentially dilutive
securities is excluded as they are anti-dilutive because of the Company's
net losses.
(2) Upon the initial public offering, all outstanding shares of convertible
preferred stock were converted into an equal number of shares of common
stock. The pro forma basic and diluted net loss per share calculation
includes the weighted average number of shares of outstanding convertible
preferred stock as if they were outstanding shares of common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 2000 and 1999
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and for each of the years ended December 31, 2000, 1999 and 1998, included
elsewhere in this annual report on Form 10-K. In addition, this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this annual report on Form 10-K contain forward-looking
statements that involve risks and uncertainties. Words such as "anticipates,"
"believes, "plans," "expects," "future," "intends," and similar expressions
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those expressed or forecasted.
Factors that might cause such differences include, but are not limited to, those
discussed in the section entitled "Additional Factors That May Affect Future
Results" and those appearing elsewhere in this annual report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-looking
statements.
OVERVIEW
Persistence is a leading provider of transactional application servers and
dynamic Web content acceleration servers -- software that processes transactions
between users and back-end computer systems in electronic commerce systems. We
were incorporated and began operations in 1991. Our first products incorporated
patented object-to-relational mapping and caching technologies, which have since
become the foundation for our PowerTier product family. From 1992 to 1996, we
introduced a variety of enhancements to these products, including a patented
data transformation technology for mapping objects to database tables, and
caching capabilities.
In 1996, we developed our PowerTier transactional application server, which
integrates all of the previously released Persistence products with new shared
transactional caching technologies, which enable multiple users to
simultaneously access the same cached data. We first shipped our PowerTier for
C++ transactional application server in 1997. Sales of PowerTier for C++
accounted for the majority of our revenues in 1997, 1998, and 1999, during which
years we added a professional services staff to enable our customers to
implement PowerTier more rapidly. We were one of the first companies to adopt
and implement the EJB specification. In 1998, we introduced PowerTier for EJB,
which customers have frequently purchased together with PowerTier for C++. Our
most recent version of PowerTier for EJB is currently in use by several major
customers and was commercially released in March 2000. We currently plan to
continue to focus product development efforts on enhancements to both the
PowerTier for C++ and the PowerTier for EJB products.
Our revenues, which consist of software license revenues and service
revenues, totaled $25.3 million in 2000, $14.4 million in 1999, and $10.2
million in 1998. License revenues consist of licenses of our software products,
which generally are priced based on the number of users or servers. Service
revenues consist of professional services consulting, customer support and
training. Because we only commenced selling application servers in 1997, we have
a limited operating history in the application server market. We expect that, as
a percentage of total revenues, sales of PowerTier for EJB transaction servers
will increase and sales of PowerTier for C++ will decrease in the future.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom, Germany, Hong Kong and
Shanghai. Revenues from licenses and services to customers outside the United
States were $7.2 million in 2000, $4.1 million in 1999 and $2.9 million in 1998
which represented approximately 28% of total revenues in each of these years.
Our future success will depend, in part, on our successful development of
international markets for our products.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. Sales of products to our top
five customers accounted for 40% of total revenues in 2000, 35% of total
revenues in 1999, and 55% of total revenues in 1998. In addition, the identity
of our top five customers has changed from year to year. In the future, it is
likely that a relatively few large customers could continue to account for a
relatively large proportion of our revenues.
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To date, we have sold our products primarily through our direct sales
force, and we will need to continue to hire sales people, in particular those
with expertise in channel sales, in order to meet our sales goals. In addition,
our ability to achieve significant revenue growth will depend in large part on
our success in establishing and leveraging relationships with OEM partners and
other resellers.
We recognize revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statements of Position 98-4 and 98-9. Future
implementation guidance relating to these standards or any future standards may
result in unanticipated changes in our revenue recognition practices, and these
changes could affect our future revenues and earnings. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulleting ("SAB") No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 provided
guidance on the recognition, presentation and disclosure of revenue in the
financial statements. SAB No. 101 outlines basic criteria that must be met to
recognized revenue and provides guidance for disclosure related to revenue
recognition policies. The Company was required to implement SAB No. 101 in the
fourth quarter of the year ended December 31, 2000. The provisions of SAB No.
101 did not have a material impact on the Company's consolidated financial
position or results of operations.
We recognize license revenues upon shipment of the software if collection
of the resulting receivable is probable, an executed agreement has been signed,
the fee is fixed or determinable and vendor-specific objective evidence exists
to allocate a portion of the total fee to any undelivered elements of the
arrangement. Undelivered elements in these arrangements typically consist of
services. For sales made through distributors, revenue is recognized upon
shipment. Distributors have no right of return. We recognize revenues from
customer training, support and consulting services as the services are
performed. We generally recognize support revenues ratably over the term of the
support contract. If support or professional services are included in an
arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority to
make such decision. Arrangements that require significant modification or
customization of software are recognized under the percentage of completion
method.
Since inception, we have incurred substantial research and development
costs and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. The number of our employees increased from 127 as of
December 31, 1999 to 152 as of December 31, 2000, representing an increase of
20%. We have incurred net losses in each quarter since 1996 and, as of December
31, 2000, had an accumulated deficit of $40.8 million. We are currently
targeting that sales and marketing expenses, research and development expenses,
and general and administrative expenses, will remain relatively flat during
2001. We expect to incur net losses during 2001, and potentially thereafter.
We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as indicative of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets. We may
not achieve or maintain profitability in the future. Our success depends
significantly upon broad market acceptance of our PowerTier for EJB application
server. Because Sun Microsystems controls the EJB standard, we need to maintain
a good working relationship with them to develop future versions of PowerTier
for EJB, as well as additional products using the EJB standard. Our performance
will also depend on the level of capital spending in our target market of
customers and on the growth and widespread adoption of the market for
business-to-business electronic commerce over the Internet.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues
Our revenues were $25.3 million for 2000 and $14.4 million for 1999
representing an increase of 75%. International revenues were $7.2 million for
2000 and $4.1 million for 1999, representing an increase of 76%. For 2000, sales
to Salomon Smith Barney accounted for 16% of total revenues and sales to our top
five customers accounted for 40% of total revenues. For 1999, sales of products
and services to Cisco (a stockholder) accounted for 13% of our total revenues,
and sales of products and services to our top five customers accounted for 35%
of total revenues.
License Revenues. License revenues were $17.7 million for 2000 and $10.9
million for 1999, representing an increase of 62%. License revenues represented
70% of total revenues for 2000 and 75% of total revenues for 1999. The increase
in software license revenues was primarily due to an increase in sales of our
PowerTier for EJB application server and the increased size and productivity of
our sales team.
Service Revenues. Our service revenues were $7.6 million for 2000 and $3.6
million for 1999, representing an increase of 114%. The increase in service
revenues was primarily due to an increase in customer support fees related to
increased sales of our PowerTier platform and a doubling of our professional
services fees. Service revenues represented 30% of total revenues for 2000 and
25% of total revenues for 1999.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of packaging,
documentation and associated shipping costs. Our cost of license revenues was
$304,000 for 2000 and $170,000 for 1999. As a percentage of license revenues,
cost of license revenues remained flat at 2% for each of 2000 and 1999.
Cost of Service Revenues. Cost of service revenues consists of personnel
and other costs related to professional services, technical support and
training. Our cost of service revenues was $3.6 million for 2000 and $2.6
million for 1999, representing an increase of 36%. This increase was primarily
due to: increased staffing of $106,000; increased travel expenses of $436,000;
increased occupancy costs of $250,000; and increased prospect seminars of
$217,000. As a percentage of service revenues, cost of service revenues were 47%
for 2000 and 74% for 1999. This decrease was due to our support staff's ability
to support an increased installed base without as substantial an increase in
headcount, and greater utilization of our professional services staff. Cost of
service revenues as a percentage of service revenues may vary between periods
due to our use of third party professional services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $22.8 million for 2000 and $14.1 million for 1999, representing an
increase of 62%. This increase was primarily due to our investment in our sales
and marketing infrastructure, which included: an increase of $1.6 million to
compensate, recruit and hire sales people and sales engineers; an increase in
sales commissions of $2.4 million; an increase in advertising and promotional
events of $1.7 million; an increase travel expenses of $1.1 million; and
additional sales office and occupancy costs of $1.7 million. Sales and marketing
expenses represented 90% of total revenues for 2000 and 97% of total revenues
for 1999. We presently are targeting that 2001 sales and marketing expense
levels will remain relatively flat as compared with 2000 expense levels.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside software developers. Our
research and development expenses were $8.1 million for 2000 and $6.4 million
for 1999, representing an increase of 28%. This increase was primarily related
to: an increase in employee software developers and related personnel for
product development of $1.1 million, and increased occupancy costs of $771,000.
Research and development expenses for 1999 also include a one-time $303,000
compensation
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charge associated with the issuance of common stock to an investor at a price
which was less than the deemed fair value for accounting purposes. Research and
development expenses represented 32% of total revenues for 2000 and 44% of total
revenues for 1999. We presently are targeting that 2001 research and development
expense levels will remain relatively flat as compared with 2000 expense levels.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. Our general and administrative
expenses were $5.4 million for 2000 and $2.8 million for 1999, representing an
increase of 93%. This increase was primarily the result of: the hiring of
additional finance and administrative personnel of $1.2 million, additional
professional services of $1.3 million, including corporate and patent
prosecution legal costs; increased depreciation of $696,000; and an increase in
bad debt reserves of $448,000 due to increasing sales levels. This increase was
primarily offset by a decrease in occupancy costs of $1.2 million. General and
administrative expenses represented 21% of total revenues for 2000 and 20% of
total revenues for 1999. We presently are targeting that 2001 general and
administrative expense levels will remain relatively flat as compared with 2000
expense levels.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles was $2.9 million for 2000 and $576,000 for 1999. The increase in
amortization was due to the increased level of purchased intangibles, primarily
resulting from our acquisition of additional purchased technology during 2000.
Interest and Other Income (Expense). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings, and, in 2000, various miscellaneous state
and foreign taxes, and other expenses. Interest and other income (expense) was
$1.1 million for 2000 and $859,000 for 1999, representing an increase of 32%. We
expect that interest and other income (expense) will decrease as we continue to
use our net proceeds from our initial public offering.
Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 2000, 1999, 1998 and 1997 have been
considered to be compensatory, as the estimated fair value for accounting
purposes was greater than the stock price as determined by the board of
directors on the date of grant or issuance. Total deferred stock compensation
associated with equity transactions as of December 31, 2000 was $592,000, net of
amortization. Deferred stock compensation is being amortized ratably over the
vesting periods of these securities. Amortization expense was $416,000 in 2000
and $971,000 in 1999. We expect to record amortization expense related to these
securities of approximately $332,000 in 2001.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
As of December 31, 2000, we had $34.0 million of federal and $7.8 million
of state net operating loss carryforwards available to offset future taxable
income. The federal net operating loss carryforwards expire through 2020, while
the state net operating loss carryforwards expire through 2005. The net
operating loss carryforwards for state tax purposes are substantially less than
for federal tax purposes, primarily because only 50% of state net operating loss
carryforwards can be utilized to offset future state taxable income. The Tax
Reform Act of 1986 limits the use of net operating loss carryforwards in
situations where changes occur in the stock ownership of a company. If we should
be acquired or otherwise have an ownership change, as defined in the Tax Reform
Act of 1986, our utilization of these carryforwards could be restricted.
As of December 31, 2000, the Company also had research and development tax
credit carryforwards of $980,000 and $766,000 available to offset future federal
and state income taxes, respectively. The federal credit carryforward expires in
2015, while the state credit carryforward has no expiration.
We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. We
evaluate on a quarterly basis the recoverability of the net deferred tax assets
and the level of the valuation allowance. If and when we determine that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
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YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Our revenues were $14.4 million for 1999 and $10.2 million for 1998,
representing an increase of 42%. International revenues were $4.1 million for
1999 and $2.9 million for 1998, representing an increase of 41%. In 1999, sales
of products to Cisco (a stockholder) accounted for 13% of total revenues, and
sales of products to our top five customers represented 35% of total revenues.
In 1998, sales of software licenses to Cisco accounted for 14% of total
revenues, and sales of software licenses to Instinet accounted for 17% of total
revenues. Sales of products to our top five customers represented 55% of total
revenues in 1998.
License Revenues. License revenues were $10.9 million for 1999 and $7.5
million for 1998, representing an increase of 46%. License revenues represented
75% of total revenues for the 1999 and 74% of total revenues for 1998. The
increase in software license revenues was primarily due to sales of our then new
PowerTier for EJB application server and the increased size and productivity of
our sales team.
Service Revenues. Our service revenues were $3.6 million for 1999 and $2.7
million for 1998, representing an increase of 32%. The increase in service
revenues was primarily due to an increase in customer support fees related to
increased sales of our PowerTier platform. Service revenues represented 25% of
total revenues for 1999 and 26% of total revenues 1998.
COST OF REVENUES
Cost of License Revenues. Our cost of license revenues was $170,000 for
1999 and $239,000 for 1998. As a percentage of license revenues, cost of license
revenues were 2% for 1999 and 3% for 1998. This decrease was primarily
attributable to lower packaging and document distribution costs as a result of a
change to electronic distribution of these materials.
Cost of Service Revenues. Our cost of service revenues was $2.6 million for
1999 and $1.4 million for 1998, representing an increase of 92%. This increase
was primarily due to increased staffing in our support organization to support a
greater installed base of customers. As a percentage of service revenues, cost
of service revenues were 74% for 1999 and 51% for 1998.
OPERATING EXPENSES
Sales and Marketing. Our sales and marketing expenses were $14.1 million
for 1999 and $7.2 million for 1998, representing an increase of 96%. This
increase was primarily due to: our investment in our sales and marketing
infrastructure, which included significant personnel-related costs to recruit
and hire sales people and sales engineers and their compensation of $3.4
million; increased advertising and marketing costs of $1.2 million; additional
sales office costs of $1.0 million; and increased travel and entertainment costs
of $889,000. Sales and marketing expenses represented 97% of total revenues for
1999 and 71% of total revenues for 1998.
Research and Development. Our research and development expenses were $6.4
million for 1999 and $4.2 million for 1998, representing an increase of 50%.
This increase was primarily related to: an increase in employee and consultant
software developers and related personnel for product development of $1.8
million; and an increase in occupancy costs of $324,000. Research and
development expenses for 1999 also include a one-time $303,000 compensation
charge associated with the issuance of common stock to an investor at a price
which was less than the deemed fair value for accounting purposes. Research and
development expenses represented 44% of total revenues for 1999 and 42% of total
revenues for 1998.
General and Administrative. Our general and administrative expenses were
$2.8 million for 1999 and $1.2 million for 1998, representing an increase of
128%. This increase was primarily the result of: the hiring of additional
finance and administrative personnel of $1.0 million, insurance costs and other
costs associated with being a public company of $215,000; and bad-debt write-off
of $467,000. Those increases were primarily offset by a decrease in occupancy
costs of $345,000. General and administrative expenses represented 20% of total
revenues for 1999 (16% without the bad-debt write off) and 12% of total revenues
for 1998.
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Interest and Other Income (Expense). Interest and other income (expense)
was $859,000 for 1999 and $1,000 for 1998. This increase was earned on the net
proceeds received from our initial public offering of common stock on June 24,
1999.
Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 1999, 1998 and 1997 have been considered to
be compensatory, as the estimated fair value for accounting purposes was greater
than the stock price as determined by the board of directors on the date of
grant or issuance. Total deferred stock compensation associated with equity
transactions as of December 31, 1999 was $1.2 million, net of amortization.
Deferred stock compensation is being amortized ratably over the vesting periods
of these securities. Amortization expense was $971,000 in 1999 and $331,000 in
1998.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statement of
operations data for each of the twelve quarters in the three-year period ended
December 31, 2000, as well as this data expressed as a percentage of our total
revenues for the periods indicated. This data has been derived from our
unaudited consolidated financial statements, which have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of our management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information when read in
conjunction with the consolidated financial statements and notes thereto. Our
quarterly results have been in the past and may in the future be subject to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.
QUARTER ENDED
-------------------------------------------------------------------
MAR.31, JUN.30, SEP.30, DEC.31, MAR.31, JUN.30, SEP.30,
1998 1998 1998 1998 1999 1999 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License....................... $1,004 $ 1,447 $2,250 $2,777 $2,116 $ 3,463 $ 1,747
Service....................... 706 604 643 729 747 784 878
------- ------- ------ ------ ------- ------- -------
Total revenues.............. 1,710 2,051 2,893 3,506 2,863 4,247 2,625
------- ------- ------ ------ ------- ------- -------
Cost of revenues:
License....................... 56 63 93 27 42 56 19
Service....................... 326 345 334 367 580 695 490
------- ------- ------ ------ ------- ------- -------
Total cost of revenues...... 382 408 427 394 622 751 509
------- ------- ------ ------ ------- ------- -------
Gross profit................... 1,328 1,643 2,466 3,112 2,241 3,496 2,116
------- ------- ------ ------ ------- ------- -------
Operating expenses:
Sales and marketing........... 1,687 1,449 1,885 2,147 2,015 2,956 4,057
Research and development...... 1,038 1,072 1,032 1,092 1,806 1,305 1,533
General and administrative.... 311 272 290 364 383 538 1,146
Amortization of purchased
intangibles................. -- -- -- -- -- 63 188
------- ------- ------ ------ ------- ------- -------
Total operating expenses.... 3,036 2,793 3,207 3,603 4,204 4,862 6,924
------- ------- ------ ------ ------- ------- -------
Loss from operations........... (1,708) (1,150) (741) (491) (1,963) (1,366) (4,808)
Interest income (expense),
net........................... 4 (20) (20) 37 48 42 410
------- ------- ------ ------ ------- ------- -------
Net loss....................... $(1,704) $(1,170) $ (761) $ (454) $(1,915) $(1,324) $(4,398)
======= ======= ====== ====== ======= ======= =======
Shares used in calculating
basic and diluted net loss per
share......................... 6,733 6,797 6,797 6,591 7,044 7,860 18,449
======= ======= ====== ====== ======= ======= =======
Basic and diluted net loss per
share......................... $(0.25) $ (0.17) $(0.11) $(0.07) $(0.27) $ (0.17) $ (0.24)
======= ======= ====== ====== ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License....................... 58.7% 70.6% 77.8% 79.2% 73.9% 81.5% 66.6%
Service....................... 41.3 29.4 22.2 20.8 26.1 18.5 33.4
------- ------- ------ ------ ------- ------- -------
Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------ ------ ------- ------- -------
Cost of revenues:
License....................... 3.3 3.1 3.2 0.8 1.5 1.3 0.7
Service....................... 19.0 16.8 11.5 10.5 20.3 16.4 18.7
------- ------- ------ ------ ------- ------- -------
Total cost of revenues...... 22.3 19.9 14.8 11.2 21.7 17.7 19.4
------- ------- ------ ------ ------- ------- -------
Gross margin................... 77.7 80.1 85.2 88.8 78.3 82.3 80.6
------- ------- ------ ------ ------- ------- -------
Operating expenses:
Sales and marketing........... 98.7 70.6 65.2 61.2 70.4 69.6 154.6
Research and development...... 60.7 52.3 35.7 31.1 63.1 30.7 58.4
General and administrative.... 18.2 13.3 10.0 10.4 13.4 12.7 43.7
Amortization of purchased
Intangibles................. -- -- -- -- -- 1.5 7.2
------- ------- ------ ------ ------- ------- -------
Total operating expenses.... 177.5 136.2 110.9 102.8 146.8 114.5 263.8
------- ------- ------ ------ ------- ------- -------
Loss from operations........... (99.9) (56.1) (25.6) (14.0) (68.6) (32.2) (183.2)
Interest income (expense),
net........................... 0.2 (1.0) (0.7) 1.1 1.7 1.0 15.6
------- ------- ------ ------ ------- ------- -------
Net loss....................... (99.6)% (57.0)% (26.3)% (12.9)% (66.9)% (31.2)% (167.5)%
======= ======= ====== ====== ======= ======= =======
QUARTER ENDED
-----------------------------------------------
DEC.31, MAR.31, JUN.30, SEP.30, DEC.31,
1999 2000 2000 2000 2000
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License....................... $ 3,564 $2,881 $ 4,402 $ 5,356 $ 5,045
Service....................... 1,144 1,329 1,556 1,728 2,980
------- ------- ------- ------- -------
Total revenues.............. 4,708 4,210 5,958 7,084 8,025
------- ------- ------- ------- -------
Cost of revenues:
License....................... 53 50 16 207 31
Service....................... 868 715 902 857 1,118
------- ------- ------- ------- -------
Total cost of revenues...... 921 765 918 1,064 1,149
------- ------- ------- ------- -------
Gross profit................... 3,787 3,445 5,040 6,020 6,876
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........... 5,024 5,998 5,255 5,234 6,268
Research and development...... 1,713 2,013 2,213 2,042 1,859
General and administrative.... 753 867 1,492 1,649 1,423
Amortization of purchased
intangibles................. 325 496 771 799 859
------- ------- ------- ------- -------
Total operating expenses.... 7,815 9,374 9,731 9,724 10,409
------- ------- ------- ------- -------
Loss from operations........... (4,028) (5,929) (4,691) (3,704) (3,533)
Interest income (expense),
net........................... 358 367 290 299 175
------- ------- ------- ------- -------
Net loss....................... $(3,670) $(5,562) $(4,401) $(3,405) $(3,358)
======= ======= ======= ======= =======
Shares used in calculating
basic and diluted net loss per
share......................... 18,739 18,968 19,148 19,418 19,667
======= ======= ======= ======= =======
Basic and diluted net loss per
share......................... $ (0.20) $(0.29) $ (0.23) $ (0.18) $ (0.17)
======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License....................... 75.7% 68.4% 73.9% 75.6% 62.9%
Service....................... 24.3 31.6 26.1 24.4 37.1
------- ------- ------- ------- -------
Total revenues.............. 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of revenues:
License....................... 1.1 1.2 0.3 2.9 0.4
Service....................... 18.4 17.0 15.1 12.1 13.9
------- ------- ------- ------- -------
Total cost of revenues...... 19.6 18.2 15.4 15.0 14.3
------- ------- ------- ------- -------
Gross margin................... 80.4 81.8 84.6 85.0 85.7
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........... 106.7 142.5 88.2 73.9 78.1
Research and development...... 38.0 47.8 37.1 28.8 23.2
General and administrative.... 16.0 20.6 25.0 23.3 17.7
Amortization of purchased
Intangibles................. 5.2 11.8 12.9 11.3 10.7
------- ------- ------- ------- -------
Total operating expenses.... 166.0 222.7 163.3 137.3 129.7
------- ------- ------- ------- -------
Loss from operations........... (85.6) (140.8) (78.7) (52.3) (44.0)
Interest income (expense),
net........................... 7.6 8.7 4.9 4.2 2.2
------- ------- ------- ------- -------
Net loss....................... (78.0)% (132.4)% (73.9)% (48.1)% (41.8)%
======= ======= ======= ======= =======
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Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier products and other
products we introduce, including Dynamai;
- the possible loss of sales people;
- introduction of new products or services by us or our competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server
market;
- our lengthy sales cycle;
- our success in expanding our direct sales force and indirect distribution
channels;
- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
Our license revenues in the first quarter of 2000 were lower than those in
the fourth quarter of 1999 and our license revenues in the first quarter of 1999
were lower than those in the fourth quarter of 1998. In the future, we expect
this trend to continue, with the fourth quarter of each year accounting for the
greatest percentage of total revenues for the year and with an absolute decline
in revenues from the fourth quarter to the first quarter of the next year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through our
initial public offering of common stock in June 1999, which totaled $34.1
million in aggregate net proceeds, and private sales of convertible preferred
stock, which totaled $19.9 million in aggregate net proceeds. We have also
financed our business through a loan in the principal amount of $800,000,
borrowings of $533,000 under an equipment financing facility and capitalized
leases. As of December 31, 2000, we had $19.5 million of cash, cash equivalents
and short-term investments and $17.3 million of working capital.
Net cash used for operating activities was $11.7 million for 2000, $10.9
million for 1999 and $3.0 million in 1998. For each of 2000, 1999, and 1998,
cash used for operating activities was attributable primarily to net losses and
increases in accounts receivable. Those increases were primarily offset by
depreciation and amortization, amortization of deferred stock compensation,
accrued liabilities and deferred revenues.
Net cash used for investing activities was $108,000 for 2000, $10.0 million
for 1999, and $436,000 for 1998. For each of the periods, cash used in investing
activities reflected investments in property and
24
26
equipment. For 2000, cash used in investing activities also consisted of
purchased intangibles offset by decreases in short-term investments. For 1999,
cash used in investing activities also primarily consisted of purchases of
short-term investments and purchased intangibles.
Net cash provided by financing activities was $3.6 million for 2000, $38.2
million for 1999, and $5.7 million for 1998. Cash provided by financing
activities during these periods was primarily attributable to proceeds from the
issuance of preferred and common stock. For 2000, cash was also provided from
borrowings under an equipment financing facility, offset by repayments of loan
agreements. For 1998, cash was also provided from borrowings under a term loan
of $800,000 and partially offset by repayments of a capital lease obligations.
We have credit facilities with Comerica Bank. Under those credit
facilities, the Company has a $5.0 million revolving line of credit facility
available through October 31, 2001, an $800,000 equipment term loan, and a
second equipment financing facility for an amount up to $1 million under which
drawdowns are available through April 31, 2001. As of December 31, 2000 we had
no borrowings outstanding under the revolving line of credit facility. As of
December 31, 2000, we had a promissory note in favor of Comerica related to our
first equipment term loan, under which $333,000 out of an original $800,000 was
outstanding. We are required to make principal payments of $22,222 per month
plus interest of 7.75% per annum on the unpaid principal balance, payable in 18
monthly installments. As of December 31, 2000 we had $533,000 outstanding under
the second equipment financing facility. Under this facility, all borrowings
outstanding on May 1, 2001 will automatically convert to a 30-month term loan
having equal monthly payments of principal and interest. Borrowings under the
equipment financing facility will bear interest at the bank's base rate plus
0.50%. The bank's credit facilities require the Company, among other things, to
maintain a minimum tangible net worth of $10 million and a minimum quick ratio
(current assets not including inventory less current liabilities) of 2 to 1. As
of both June 30, 2000 and September 30, 2000, the Company's tangible net worth
fell below the minimum tangible net worth ratio then in effect, and the bank
waived both of those previous events. As of December 31, 2000, we were in
compliance with our debt covenants. Borrowings under the facilities are
collateralized by substantially all of the Company's assets
Although we have no material commitments for capital expenditures, we
anticipate an increase, possibly substantial, in capital expenditures and lease
commitments consistent with our anticipated growth in operations, infrastructure
and personnel. We also may increase our capital expenditures as we expand into
additional international markets.
We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures through at least 2001. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or to obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the term of this debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and we may not be able to
obtain additional financing on acceptable terms, if at all. If we are unable to
obtain this additional financing, we may be required to reduce the scope of our
planned product development and marketing efforts, which could harm our
business.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued accounting
statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires companies to record derivatives on the
balance sheet as assets or liabilities measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 will be effective for us beginning in 2001. We believe
the impact of adopting the standard will not be material to our financial
position, results of operations or cash flows.
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27
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provided guidance on the recognition, presentation and
disclosure of revenue in the financial statements. SAB No. 101 outlines basic
criteria that must be met to recognized revenue and provides guidance for
disclosure related to revenue recognition policies. The Company was required to
implement SAB No. 101 in the fourth quarter of the year ended December 31, 2000.
The provisions of SAB No. 101 did not have a material impact on the Company's
consolidated financial position or results of operations.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- An
Interpretation of APB Opinion No 2. 25." FIN 44, effective July 1, 2000,
clarifies the application of APB No. 25 for matters including: the definition of
an employee for purposes of APB No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option or award; and the
accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN No. 44 did not have a material impact on the
Company's consolidated financial position or results of operations.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this annual report on Form 10-K. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER MARKET.
Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. We thus face the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in the rapidly changing software
industry. These risks include:
- the timing and magnitude of capital expenditures by our customers and
prospective customers;
- our substantial dependence for revenue from our PowerTier for C++
product, which was first introduced in 1997 and has achieved only limited
market acceptance;
- our substantial dependence for revenue from our PowerTier for EJB
product, which was first introduced in 1998 and has achieved only limited
market acceptance;
- our need to expand our distribution capability through various sales
channels, including a direct sales organization, original equipment
manufacturers, third party distributors and systems integrators;
- our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for application
servers;
- our unproven ability to compete in a highly competitive market;
- uncertainty as to the growth rate in the electronic commerce market and,
in particular, the business-to-business electronic commerce market;
- our need to achieve market acceptance for our new product introductions,
including Dynamai;
- our dependence on Enterprise JavaBeans, commonly known as EJB, becoming a
widely accepted standard in the transactional application server market;
and
- our dependence upon key personnel.
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28
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME
OR REMAIN PROFITABLE.
Our revenues may not continue to grow, and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $16.7 million in 2000, $11.3
million in 1999, $4.1 million in 1998 and $4.7 million in 1997. As of December
31, 2000, we had an accumulated deficit of $40.8 million. While we are currently
targeting relatively flat sales and marketing, research and development, and
general and administrative expenses for 2001, we will still need to increase our
revenues to become profitable. Because our product market is new and evolving,
we cannot accurately predict either the future growth rate, if any, or the
ultimate size of the market for our products.
WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH
GENERATED BY OUR OPERATIONS.
Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through sales of common stock
and convertible preferred stock and not through cash generated by our
operations. We expect to continue to have negative cash flow from operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
Although we believe that our current cash, cash equivalents and short-term
investment balances will be sufficient to meet our anticipated operating cash
needs through at least 2001, we may need to raise additional funds prior to that
time. We face several risks in connection with this possible need to raise
additional capital:
- the issuance of additional securities could result in:
- debt securities with rights senior to the common stock;
- dilution to existing stockholders as a result of issuing additional
equity or convertible debt securities;
- debt securities with restrictive covenants that could restrict our
ability to run our business as desired; or
- securities issued on disadvantageous financial terms.
- the failure to procure needed funding could result in:
- a dramatic reduction in scope in our planned product development or
marketing efforts; or
- an inability to respond to competitive pressures or take advantage of
market opportunities, which could adversely affect our ability to
achieve profitability or positive cash flow.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Our operating results have fluctuated significantly in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. In particular, the fourth quarter of each year
has in the past tended to account for the greatest percentage of total revenues
for the year, and we have often experienced an absolute decline in revenues from
the fourth quarter to the first quarter of the next year. If our future
quarterly operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. The factors that
may cause fluctuations of our operating results include the following:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier products and other
products we introduce;
- the possible loss of sales people;
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- introduction of new products or services by us or our competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server and
web content acceleration server markets;
- our lengthy sales cycle;
- our success in expanding our various sales channels, including a direct
sales force and indirect distribution channels;
- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer, as well as the overall economic climate for
internet-related capital expenditures. Due to the relative importance of many of
our product sales, a lost or delayed sale could adversely affect our quarterly
operating results. Our sales cycle is affected by seasonal fluctuations as a
result of our customers' fiscal year budgeting cycles and slow summer purchasing
patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In 2000, sales of products and
services to Salomon Smith Barney accounted for 16% of total revenues and sales
to our top five customers accounted for 40% of total revenues. In 1999, sales of
products and services to Cisco accounted for 13% of our total revenues, and
sales of products and services to our top five customers accounted for 35% of
total revenues. In 1998, sales of products and services to Cisco accounted for
14% of our total revenues, sales of products and services to Instinet accounted
for 17% of our total revenues, and sales of products and services to our top
five customers accounted for 55% of total revenues. In addition, the identity of
our top five customers has changed from year to year. If we lose a significant
customer, or fail to increase product sales to an existing customer as planned,
we may not be able to replace the lost revenues with sales to other customers.
In addition, because our marketing strategy is to concentrate on selling
products to industry leaders, any loss of a customer could harm our reputation
within
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the industry and make it harder for us to sell our products to other companies
in that industry. The loss of, or a reduction in sales to, one or more
significant customers would likely result in a decrease in our revenues.
WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD
AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE
TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER.
We are focusing significant marketing efforts on our PowerTier for EJB
application server, which is based on three relatively new technologies, which
have not been widely adopted by a large number of companies. These three
technologies are a distributed object computing architecture, Sun Microsystems'
Java programming language and Enterprise JavaBeans, or EJB. Distributed object
computing combines the use of software modules, or objects, communicating across
a computer network to software applications, such as our PowerTier application
server. EJB is the Java programming standard for use in an application server.
In 1998, we launched our PowerTier for EJB product, which is a transactional
application server that uses Java and conforms to the EJB standard. Sun
Microsystems released the EJB standard in 1998, and thus far EJB has had limited
market acceptance. Since our PowerTier for EJB product depends upon the
specialized EJB standard, we face a limited market compared to competitors who
may offer application servers based on more widely accepted standards, including
the Java programming language. We expect a substantial portion of our future
revenues will come from sales of products based on the EJB standard. Thus, our
success depends significantly upon broad market acceptance of distributed object
computing in general, and Java application servers in particular. If EJB does
not become a widespread programming standard for application servers, our
revenues and business could suffer.
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We may need to increase our research
and development investment to maintain our technological leadership. Our future
success depends on our ability to continue to enhance our current products and
to continue to develop and introduce new products that keep pace with
competitive product introductions and technological developments. For example,
as Sun Microsystems introduces new EJB specifications, we will need to introduce
new versions of PowerTier for EJB designed to support these new specifications
to remain competitive. If we do not bring enhancements and new versions of our
products to market in a timely manner, our market share and revenues could
decrease and our reputation could suffer. If we fail to anticipate or respond
adequately to changes in technology and customer needs, or if there are any
significant delays in product development or introduction, our revenues and
business could suffer.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must have a strong direct sales team to generate increased revenue. In
the last several years, we have experienced significant turnover in our sales
team, and in early 2001, we substantially reorganized our sales team. In order
to meet our future sales goals, we may continue to need to hire more salespeople
for both our domestic and international sales efforts. In the past, newly hired
employees have required training and approximately six to nine months experience
to achieve full productivity. Like many companies in the software industry, we
are likely to continue to experience turnover in our sales force, and thus a
number of our sales people at any given time may be relatively new and may not
meet our sales goals. In addition, our recently hired employees may not become
productive, and we may not be able to hire enough qualified individuals in the
future.
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BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES
CHANNEL THROUGH OEM PARTNERS AND OTHER RESELLERS, ANY FAILURE TO DEVELOP THIS
CHANNEL MAY RESULT IN LOWER REVENUES.
To date, we have sold our products primarily through our direct sales
force, but our ability to achieve significant revenue growth in the future will
depend in large part on our success in establishing and leveraging relationships
with OEM partners and other resellers. It may be difficult for us to establish
these relationships, and, even if we establish these relationships, we will then
depend on the sales efforts of these third-parties. In addition, because these
relationships are nonexclusive, these third parties may choose to sell
application servers or other alternative solutions offered by our competitors,
and not our products. If we fail to successfully build our third-party
distribution channels or if our third party partners do not perform as expected,
our business could be harmed.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
enormous projects to fully deploy our products and achieve our revenue goals.
These enterprise projects often take many years to complete and can be delayed
by a variety of factors, including general or industry-specific economic
downturns, our customers' budget constraints, other customer-specific delays,
problems with other system components or delays caused by the systems
integrators who may be managing the system deployment. If our customers cannot
successfully implement large-scale deployments, or they determine for any reason
that our products cannot accommodate large-scale deployments or that our
products are not appropriate for widespread use, our business could suffer. In
addition, if a systems integrator fails to complete a project utilizing our
product for a customer in a timely manner, our revenues or business reputation
could suffer.
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE EJB APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR OWN PRODUCTS.
Our success depends on achieving widespread market acceptance of our
PowerTier for EJB application server. Because Sun Microsystems controls the EJB
standard, we need to maintain a good working relationship with Sun Microsystems
to develop future versions of PowerTier for EJB, as well as additional products
using EJB, that will gain market acceptance. In March 1998, we entered into a
license agreement with Sun Microsystems, pursuant to which we granted Sun
Microsystems rights to manufacture and sell, by itself and not jointly with
others, products under a number of our patents, and Sun Microsystems granted us
rights to manufacture and sell, by ourselves and not jointly with others,
products under a number of Sun Microsystems' patents. As a result, Sun
Microsystems may develop and sell some competing products that would, in the
absence of this license agreement, infringe our patents. Because Sun
Microsystems controls the EJB standard, it could develop the EJB standard in a
more proprietary way to favor a product offered by its subsidiary, iPlanet, or a
third party, which could make it much harder for us to compete in the EJB
application server market.
MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD
DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD
ACCEPTANCE.
Microsoft has established a competing standard for distributed computing,
COM, which includes an application server product. If this standard gains
widespread market acceptance over the EJB or CORBA standards, on which our
products are based, our business would suffer. Because of Microsoft's resources
and commanding position with respect to other markets and technologies,
Microsoft's entry into the application server market may cause our potential
customers to delay purchasing decisions. We expect that Microsoft's presence in
the application server market will increase competitive pressure in this market.
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WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
- performance, including scalability, integrity and availability;
- ability to provide a complete software platform;
- flexibility;
- use of standards-based technology;
- ease of integration with customers' existing enterprise systems;
- ease and speed of implementation;
- quality of support and service;
- security;
- company reputation; and
- price.
Our competitors for both PowerTier and Dynamai include both publicly and
privately-held enterprises, including BEA Systems (WebLogic), Secant
Technologies, IBM (WebSphere), Oracle (OAS) and i-Planet (Sun Microsystems).
Many customers may not be willing to purchase our PowerTier platform because
they have already invested heavily in databases and other enterprise software
components offered by these competing companies. Many of these competitors have
preexisting customer relationships, longer operating histories, greater
financial, technical, marketing and other resources, greater name recognition
and larger installed bases of customers than we do. In addition, some
competitors offer products that are less complex than our PowerTier products and
require less customization to implement with potential customers' existing
systems. Thus, potential customers engaged in simpler business-to-business
e-commerce transactions may prefer these "plug-and-play" products to our more
complex offerings. Moreover, there are other very large and established
companies, including Microsoft, who offer alternative solutions and are thus
indirect competitors. Further, dozens of companies have already supported, or
have announced their intention to support EJB, and may compete against us in the
future. These competitors and potential competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products than we can. In addition, in the PowerTier for C++ market, many
potential customers build their own custom application servers, so we
effectively compete against our potential customers' internal information
technology departments.
In the Dynamai market, similar dynamic Web content acceleration technology
is available from a variety of sources, including but not limited to internal
development, application server vendors such as Oracle, electronic commerce
software vendors such as Intershop and ATG, content delivery networks such as
Akamai and epicRealm, and emerging software and hardware appliance vendors such
as Chutney and Cachier, who are directly targeting Dynamai's market.
IF THE MARKET FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVER THE INTERNET
DOES NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR
REVENUES COULD DECLINE.
Our performance and future success will depend on the growth and widespread
adoption of the market for business-to-business electronic commerce over the
Internet. If business-to-business electronic commerce does not develop in the
manner currently envisioned, our business could be harmed. Moreover, critical
issues concerning the commercial use of the Internet, including security, cost,
accessibility and quality of network service, remain unresolved and may
negatively affect the growth of the Internet as a platform for conducting
business-to-business electronic commerce. In addition, the Internet could lose
its viability due to delays in the
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development or adoption of new standards and protocols to handle increased
activity or due to increased government regulation and taxation of Internet
commerce.
OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS.
Achieving our planned revenue growth and other financial objectives will
place significant demands on our management and other resources. Our ability to
manage our resources effectively will require us to continue to develop and
improve our operational, financial and other internal systems and controls, as
well as our business development capabilities, and to train, motivate and manage
our employees. If we are unable to manage our resources effectively, we may not
be able to retain key personnel and the quality of our services and products may
suffer.
OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY
EMPLOYEES.
Our future success depends on the ability of our management to operate
effectively, both individually and as a group. We are substantially dependent
upon the continued service of our existing executive personnel, especially
Christopher T. Keene, our Chief Executive Officer and Chairman of the Board. We
do not have a key person life insurance policy covering Mr. Keene or any other
officer or key employee. Our success will depend in large part upon our ability
to attract and retain highly-skilled employees, particularly sales personnel and
software engineers. There is significant competition for skilled employees,
especially for people who have experience in both the software and Internet
industries. We have experienced significant turnover among sales personnel in
recent years, which makes retention more challenging. If we are not successful
in attracting and retaining these skilled employees, our sales and product
development efforts would suffer. In addition, if one or more of our key
employees resigns to join a competitor or to form a competing company, the loss
of that employee and any resulting loss of existing or potential customers to a
competitor could harm our business. If we lose any key personnel, we may not be
able to prevent the unauthorized disclosure or use of our technical knowledge or
other trade secrets by those former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly
when first introduced or when new versions or enhancements are released. Our
products have in the past contained and may in the future contain errors and
defects, which may be serious or difficult to correct and which may cause delays
in subsequent product releases. Delays in shipment of scheduled software
releases or serious defects or errors could result in lost revenues or a delay
in market acceptance, which could have a material adverse effect on our revenues
and reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 28% of our revenues came
from sales of products and services outside of the United States during each of
2000, 1999, and 1998. We expect international revenues to continue to represent
a significant portion of our total revenues. To date, almost all of our
international revenues have resulted from
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our direct sales efforts. In international markets, however, we expect that we
will depend more heavily on third party distributors to sell our products in the
future. The success of our international strategy will depend on our ability to
develop and maintain productive relationships with these third parties. The
failure to develop key international markets for our products could cause a
reduction in our revenues. Additional risks related to our international
expansion and operation include:
- difficulties of staffing and managing foreign operations;
- our dependence on the sales efforts of our third party distributors;
- longer payment cycles typically associated with international sales;
- tariffs and other trade barriers;
- failure to comply with a wide variety of complex foreign laws and
changing regulations;
- exposure to political instability and economic downturns;
- failure to localize our products for foreign markets;
- restrictions on the export of technologies;
- potentially adverse tax consequences;
- reduced protection of intellectual property rights in some countries; and
- currency fluctuations.
We sell products outside the United States in U.S. dollars. We do not
currently engage in any hedging transactions to reduce our exposure to currency
fluctuations as a result of our foreign operations. We are not currently ISO
9000 compliant, nor are we attempting to meet all foreign technical standards
that may apply to our products. Our failure to develop our international sales
channel as planned could cause a decline in our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products, which could harm our business. We rely on patent
protection, as well as a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual restrictions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. We have in the past brought lawsuits
to protect our intellectual property rights. Further litigation may be necessary
to enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
WE MAY BE SUED FOR PATENT INFRINGEMENT.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. As the number of
competitors in the application server and web content acceleration server
markets grow and the functionality of products in different market segments
overlaps, the possibility of an intellectual property claim against us
increases. For example, we may inadvertently infringe a patent of which we are
unaware. In addition, because patent applications can take many years to issue,
there may be a patent application now pending of which we are unaware, which
will cause us to be infringing when it is issued in the future. To address these
patent infringement or other intellectual property claims, we may have to enter
into royalty or licensing agreements on disadvantageous commercial terms.
Alternatively, we may be unable to obtain a necessary license. A successful
claim against us, and our failure to license the infringed or similar
technology,
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would harm our business. In addition, any infringement or other intellectual
property claims, with or without merit, which are brought against us could be
time consuming and expensive to litigate or settle and could divert management
attention from administering our core business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our common stock could fall. In
addition, these sales of common stock could impede our ability to raise funds at
an advantageous price through the sale of securities. As of December 31, 2000,
we had 19.9 million shares of common stock outstanding. Virtually all of our
shares, other than shares held by affiliates, are freely tradeable. In addition,
shares held by affiliates are tradeable, subject to the volume and other
restrictions of Rule 144.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock has only been available in the public market since June
24, 1999. An active public market for our common stock has not completely
developed. To date, the market price of our common stock has been highly
volatile and may rise or fall in the future as a result of many factors, such
as:
- variations in our quarterly results;
- announcements of technological innovations by us or our competitors;
- introductions of new products by us or our competitors;
- acquisitions or strategic alliances by us or our competitors;
- hiring or departure of key personnel;
- the gain or loss of a significant customer or order;
- changes in estimates of our financial performance or changes in
recommendations by securities analysts;
- market conditions and expectations regarding capital spending in the
software industry and in our customers' industries; and
- adoption of new accounting standards affecting the software industry.
The market prices of the common stock of many companies in the software and
Internet industries have experienced extreme price and volume fluctuations,
which has often been unrelated to these companies' operating performance. In the
past, securities class action litigation has often been brought against a
company after a period of volatility in the market price of its stock. We may in
the future be a target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could harm our business.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER
APPROVAL.
As of February 28, 2001, executive officers and directors, and entities
affiliated with them, owned approximately 28% of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, continue to control
the election of a majority of the directors and the determination of all
corporate actions. This concentration of voting control could have the effect of
delaying or preventing a merger or other change in control, even if it would
benefit our other stockholders.
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THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
- establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
- authorizing the board to issue preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. For
example, we have acquired object request broker technology and servlet engine
technology. While we have no current agreements or negotiations underway with
respect to any major acquisitions, we may make acquisitions of businesses,
products or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any of which could materially and
adversely affect our financial results and the price of our common stock:
- issue equity securities that would dilute existing stockholders'
percentage ownership;
- incur substantial debt;
- assume contingent liabilities; or
- take substantial charges in connection with the amortization of goodwill
and other intangible assets.
Acquisitions also entail numerous risks, including:
- difficulties in assimilating acquired operations, products and personnel
with our pre-existing business;
- unanticipated costs;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have limited or no prior
experience; and
- potential loss of key employees from either our preexisting business or
the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
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WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THE COMPANY'S
INITIAL PUBLIC OFFERING OF COMMON STOCK, AND THUS MAY USE THE REMAINING NET
PROCEEDS TO FUND OPERATING LOSSES, FOR ACQUISITIONS OR FOR OTHER CORPORATE
PURPOSES.
We have not designated any specific use for the net proceeds of our initial
public offering of common stock. As a result, our management and board of
directors has broad discretion in spending the remaining net proceeds of that
offering. We currently expect to use the remaining net proceeds primarily for
working capital and general corporate purposes, funding product development and
funding our sales and marketing organization. In addition, we may use a portion
of the remaining net proceeds for further development of our product lines
through acquisitions of products, technologies and businesses.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Sensitivity. Our operating results are sensitive to changes
in the general level of U.S. interest rates, particularly because most of our
cash equivalents are invested in short-term debt instruments. If market interest
rates were to change immediately and uniformly by ten percent from levels at
December 31, 2000, the fair value of our cash equivalents would change by
approximately $80,000.
Foreign Currency Fluctuations. We have not had any significant transactions
in foreign currencies, nor did we have any significant balances that are due or
payable in foreign currencies at December 31, 2000. Therefore, a hypothetical
ten percent change in foreign currency rates would have an insignificant impact
on our financial position or results of operations. We do not hedge any of our
foreign currency exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the consolidated financial statements and
supplementary data that are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
The Company's Proxy Statement for its 2001 Annual Meeting of Stockholders,
when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,
will be incorporated by reference in this Form 10-K pursuant to General
Instruction G(3) of Form 10-K and will provide the information required under
Part III (Items 10-13), except for the information with respect to the Company's
executive officers, which is included in "Item 1. Business -- Executive
Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements and Report of Deloitte & Touche LLP (pages F-1
through F-18):
Audited Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule (pages S-1 through S-3)
Audited Consolidated Financial Statement Schedule:
Independent Auditors' Report
Schedule II -- Consolidated Schedule of Valuation and Qualifying
Accounts for the years ended December 31, 2000, 1999 and 1998
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.2* Amended and Restated Certificate of Incorporation of
Persistence.
3.4 Amended and Restated Bylaws of Persistence, as amended on
July 31, 2000.
4.1* Specimen Stock Certificate.
10.1* Form of Common Stock Purchase Agreement between Persistence
and each of Christopher T. Keene and Derek P. Henninger.
10.2* Fifth Amended and Restated Investor Rights Agreement dated
February 19, 1999 among Persistence and certain investors.
10.4* Form of Change of Control Agreement between Persistence and
each of James H. Barton, Mark Palmer and Christine Russell.
10.5* 1994 Stock Purchase Plan (as amended) and Form of Common
Stock Purchase Agreement.
10.6* 1997 Stock Plan (as amended) and Forms of Stock Option
Agreement and Common Stock Purchase Agreement.
10.7* 1999 Employee Stock Purchase Plan and Form of Subscription
Agreement.
10.8* 1999 Directors' Stock Option Plan and Form of Option
Agreement.
10.9* Lease dated June 12, 1991 between Persistence and Great
American Bank (as amended).
10.10*+ Settlement and License Agreement dated March 23, 1998
between Persistence and Sun Microsystems, Inc.
10.11* Form of Indemnification Agreement between Persistence and
officers and directors.
21.1* List of subsidiaries.
23.1 Independent Auditors' Consent.
- ---------------
* Incorporated herein by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (Commission File No. 333-76867)
+ Confidential treatment requested as to portions of this exhibit.
(b) Reports on Form 8-K
None.
38
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K for the fiscal year ended December 31, 2000 to be signed on its behalf by
the undersigned, thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTOPHER T. KEENE
------------------------------------
Christopher T. Keene
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ CHRISTINE RUSSELL
------------------------------------
Christine Russell
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: April 2, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Christine Russell his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorney-in-fact, or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHRISTOPHER T. KEENE Chairman of the Board and Chief April 2, 2001
- ----------------------------------------------------- Executive Officer (Principal
Christopher T. Keene Executive Officer)
/s/ CHRISTINE RUSSELL Chief Financial Officer April 2, 2001
- ----------------------------------------------------- (Principal Financial and
Christine Russell Accounting Officer)
/s/ GREGORY ENNIS Director March 29, 2001
- -----------------------------------------------------
Gregory Ennis
Director
- -----------------------------------------------------
Sanjay Vaswani
/s/ JOSEPH P. ROEBUCK Director March 30, 2001
- -----------------------------------------------------
Joseph P. Roebuck
/s/ JEFFREY T. WEBBER Director March 30, 2001
- -----------------------------------------------------
Jeffrey T. Webber
39
41
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Audited Consolidated Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets at December 31, 2000 and
1999................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................... F-6
Notes to Consolidated Financial Statements................ F-7
F-1
42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the accompanying consolidated balance sheets of Persistence
Software, Inc. and subsidiary (the "Company") as of December 31, 2000 and 1999,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
January 30, 2001
(February 28, 2001 as
to the table in Note 4)
F-2
43
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 14,103 $ 22,300
Short-term investments.................................... 5,387 7,352
Accounts receivable, net of allowances of $1,228 and $332,
respectively........................................... 7,121 5,685
Prepaid expenses and other current assets................. 831 965
-------- --------
Total current assets.............................. 27,442 36,302
Property and equipment, net................................. 1,777 1,051
Purchased intangibles, net of amortization of $2,984 and
$576, respectively........................................ 4,310 1,669
Other assets................................................ 112 70
-------- --------
Total assets...................................... $ 33,641 $ 39,092
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,657 $ 1,370
Accrued compensation and related benefits................. 2,787 1,804
Other accrued liabilities................................. 1,731 1,194
Deferred revenues......................................... 2,682 2,015
Current portion of long-term obligations.................. 1,296 337
-------- --------
Total current liabilities......................... 10,153 6,720
Long-term obligations....................................... 932 354
-------- --------
Total liabilities................................. 11,085 7,074
-------- --------
Commitments (Note 4)
Stockholders' equity:
Preferred stock, $0.001 par value; authorized -- 5,000,000
shares; designated and outstanding --none.............. -- --
Common stock, $0.001 par value; authorized -- 75,000,000
shares; outstanding -- 2000, 19,878,712 shares; 1999,
19,269,704 shares...................................... 63,994 57,467
Deferred stock compensation............................... (592) (1,206)
Notes receivable from stockholders........................ (94) (161)
Accumulated deficit....................................... (40,798) (24,072)
Accumulated other comprehensive loss...................... -- (10)
Cumulative Translation Adjustment......................... 46 --
-------- --------
Total stockholders' equity........................ 22,556 32,018
-------- --------
Total liabilities and stockholders' equity........ $ 33,641 $ 39,092
======== ========
See notes to consolidated financial statements.
F-3
44
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Revenues:
License................................................... $ 17,684 $ 10,890 $ 7,478
Service................................................... 7,593 3,553 2,682
-------- -------- -------
Total revenues.................................... 25,277 14,443 10,160
-------- -------- -------
Cost of revenues:
License................................................... 304 170 239
Service................................................... 3,592 2,633 1,372
-------- -------- -------
Total cost of revenues............................ 3,896 2,803 1,611
-------- -------- -------
Gross profit................................................ 21,381 11,640 8,549
Operating expenses:
Sales and marketing....................................... 22,755 14,052 7,168
Research and development.................................. 8,127 6,357 4,234
General and administrative................................ 5,431 2,820 1,237
Amortization of purchased intangibles..................... 2,925 576 --
-------- -------- -------
Total operating expenses.......................... 39,238 23,805 12,639
-------- -------- -------
Loss from operations........................................ (17,857) (12,165) (4,090)
Interest and other income (expense):
Interest income........................................... 1,401 975 116
Interest expense.......................................... (60) (116) (115)
Other, net................................................ (210) -- --
-------- -------- -------
Total interest and other income (expense)......... 1,131 859 1
-------- -------- -------
Net loss.................................................... $(16,726) $(11,306) $(4,089)
======== ======== =======
Basic and diluted net loss per share........................ $ (0.87) $ (0.86) $ (0.59)
======== ======== =======
Shares used in calculating basic and diluted net loss per
share..................................................... 19,330 13,091 6,879
======== ======== =======
See notes to consolidated financial statements.
F-4
45
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE OTHER
--------------------- -------------------- STOCK FROM ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS DEFICIT LOSS
---------- -------- ---------- ------- ------------ ------------ ----------- -------------
Balances, January 1,
1998................... 5,809,872 $ 10,610 7,652,741 $ 592 $ (287) $(181) $ (8,677)
Net loss................. (4,089)
Sale of Series C
preferred stock........ 1,112,312 5,107
Issuance of common
stock.................. 4,754 1
Repurchase of common
stock.................. (23,081) (5)
Collection of notes
receivable from
stockholders........... 20
Compensatory stock
arrangements........... 2,266 (2,266)
Amortization of deferred
stock compensation..... 331
---------- -------- ---------- ------- ------- ----- -------- ----
Balances, December 31,
1998................... 6,922,184 15,717 7,634,414 2,854 (2,222) (161) (12,766)
Net loss................. (11,306)
Change in unrealized gain
(loss) on
investments............ $(10)
Comprehensive loss.......
Sale of Series D
preferred stock........ 775,701 4,142
Conversion of preferred
stock to common
stock.................. (7,697,885) (19,859) 7,697,885 19,859
Issuance of common
stock.................. 3,937,405 34,799
Compensatory stock
arrangements........... (45) 45
Amortization of deferred
stock compensation..... 971
---------- -------- ---------- ------- ------- ----- -------- ----
Balances, December 31,
1999................... -- -- 19,269,704 57,467 (1,206) (161) (24,072) (10)
Net loss................. (16,726)
Change in unrealized gain
(loss) on
investments............ 10
Cumulative translation
adjustment.............
Comprehensive loss.......
Issuance of common
stock.................. 609,008 6,725
Collection of notes
receivable from
stockholders........... 67
Compensatory stock
arrangements........... (198) 198
Amortization of deferred
stock compensation..... 416
---------- -------- ---------- ------- ------- ----- -------- ----
Balances, December 31,
2000................... -- $ -- 19,878,712 $63,994 $ (592) $ (94) $(40,798) $ --
========== ======== ========== ======= ======= ===== ======== ====
CUMULATIVE TOTAL
TRANSLATION COMPREHENSIVE
ADJUSTMENT TOTAL LOSS
----------- -------- -------------
Balances, January 1,
1998................... $ 2,057
Net loss................. (4,089)
Sale of Series C
preferred stock........ 5,107
Issuance of common
stock.................. 1
Repurchase of common
stock.................. (5)
Collection of notes
receivable from
stockholders........... 20
Compensatory stock
arrangements........... --
Amortization of deferred
stock compensation..... 331
--- --------
Balances, December 31,
1998................... -- 3,422
Net loss................. (11,306) $(11,306)
Change in unrealized gain
(loss) on
investments............ (10) (10)
--------
Comprehensive loss....... $(11,316)
========
Sale of Series D
preferred stock........ 4,142
Conversion of preferred
stock to common
stock.................. --
Issuance of common
stock.................. 34,799
Compensatory stock
arrangements........... --
Amortization of deferred
stock compensation..... 971
--- --------
Balances, December 31,
1999................... -- 32,018
Net loss................. (16,726) $(16,726)
Change in unrealized gain
(loss) on
investments............ 10 10
Cumulative translation
adjustment............. $46 46 46
--------
Comprehensive loss....... $(16,670)
========
Issuance of common
stock.................. 6,725
Collection of notes
receivable from
stockholders........... 67
Compensatory stock
arrangements........... --
Amortization of deferred
stock compensation..... 416
--- --------
Balances, December 31,
2000................... $46 $ 22,556
=== ========
See notes to consolidated financial statements.
F-5
46
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(16,726) $(11,306) $(4,089)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowance for doubtful accounts........................ 896 285 (28)
Depreciation and amortization.......................... 3,842 1,135 556
Amortization of deferred stock compensation............ 416 971 331
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,332) (4,211) 145
Prepaid expenses and other current assets............ (265) (1,000) (66)
Accounts payable..................................... 287 774 (205)
Accrued compensation and related benefits............ 983 1,292 (16)
Other accrued liabilities............................ 537 1,040 90
Deferred revenues.................................... 667 217 413
Deferred rent........................................ -- (64) (96)
-------- -------- -------
Net cash used in operating activities............. (11,695) (10,867) (2,965)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments.................................... 1,965 (7,362) --
Property and equipment additions.......................... (1,422) (919) (442)
Purchased intangibles additions........................... (619) (1,663) --
Deposits and other........................................ (32) (41) 6
-------- -------- -------
Net cash used in investing activities............. (108) (9,985) (436)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of convertible preferred stock, net.................. -- 4,142 5,107
Sale of common stock, net of repurchases.................. 3,465 34,440 1
Repurchase of common stock................................ (1) (1) (5)
Repayment of notes receivable from stockholders........... 67 -- 20
Repayment of capital lease obligations.................... (77) (167) (194)
Repayment of obligations incurred to acquire purchased
intangibles............................................ (160) -- --
Borrowing under loan agreement............................ 533 -- 800
Repayment under loan agreement............................ (267) (200) --
-------- -------- -------
Net cash provided by financing activities......... 3,560 38,214 5,729
-------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... 46 -- --
-------- -------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease)................................... (8,197) 17,362 2,328
Beginning of year......................................... 22,300 4,938 2,610
-------- -------- -------
End of year............................................... $ 14,103 $ 22,300 $ 4,938
======== ======== =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment under capital
leases................................................. $ 73 $ -- $ --
======== ======== =======
Long-term obligations incurred to acquire purchased
intangibles............................................ $ 1,435 $ -- $ --
======== ======== =======
Common stock issued for purchased intangibles............. $ 3,063 $ 360 $ --
======== ======== =======
Conversion of convertible preferred stock into common
stock.................................................. $ -- $ 19,859 $ --
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- CASH
PAID DURING THE YEAR FOR:
Interest.................................................. $ 60 $ 114 $ 115
======== ======== =======
Income taxes.............................................. $ 132 $ 3 $ 1
======== ======== =======
See notes to consolidated financial statements.
F-6
47
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business -- Persistence is a leading provider of transaction application
servers and dynamic Web content acceleration servers -- software that processes
transactions between users and back-end computer systems in electronic commerce
systems. Persistence's PowerTier application server software caches corporate
application data to speed business transactions, while the Company's Dynamai
application-aware software is designed to cache dynamic Web content to speed
Internet transactions.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. All
intercompany transactions and balances have been eliminated in consolidation.
Cash Equivalents -- The Company considers all highly liquid debt
instruments purchased with remaining maturities of less than three months to be
cash equivalents.
Short-term Investments -- Short-term investments consist primarily of
highly liquid debt instruments purchased with remaining maturity dates of
greater than 90 days but less than 12 months. Management determines the
classification of debt and equity securities at the time of purchase and
reevaluates the classification at each balance sheet date. Debt securities are
classified as available-for-sale when the Company generally has the ability and
intent to hold such securities to maturity, but, in certain circumstances, may
potentially dispose of such securities prior to their maturity. Securities
available-for-sale are reported at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity. All available-
for-sale securities are classified as current assets. At December 31, 2000 and
1999, short-term investments consisted of corporate debt securities (commercial
paper) and U.S. government debt securities with maturities of less than one
year.
Short-term investments include the following available-for-sale securities
at December 31, 1999 (in thousands):
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
Money market funds....................... $ 1,682 -- -- $ 1,682
Commercial paper......................... 13,107 $ 1 -- 13,108
U.S. government agencies................. 14,105 -- $(11) 14,094
------- ---- ---- -------
Total available-for-sale
securities................... $28,894 $ 1 $(11) $28,884
======= ==== ==== =======
Included in cash equivalents............. $21,532
Included in short-term investments....... 7,352
-------
Total available-for
sale-securities.............. $28,884
=======
F-7
48
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Short-term investments include the following available-for-sale securities
at December 31, 2000 (in thousands):
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
Money market funds....................... $ 1,863 $ 1,863
Commercial paper......................... 7,888 7,888
U.S. government agencies................. 6,615 6,615
------- ---- ---- -------
Total available-for-sale
securities................... $16,366 $ -- $ -- $16,366
======= ==== ==== =======
Included in cash equivalents............. $10,979
Included in short-term investments....... 5,387
-------
Total available-for-sale
securities................... $16,366
=======
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over estimated useful lives of three
years. Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
Purchased intangibles are stated at cost. Amortization is computed using
the straight-line method over the estimated useful lives of two to three years.
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed
Of -- The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Software Development Costs -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Computer Software To Be Sold,
Leased or Otherwise Marketed. Because the Company believes its current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
Notes Receivable from Stockholders -- The notes receivable from
stockholders were issued in exchange for common stock, bear interest at 5.93%
per annum, and are due in December 2001. The notes are full-recourse.
Revenue Recognition -- Revenue consists primarily of fees for licenses of
the Company's software products, maintenance and customer support.
License Revenue -- Revenue from software licenses is recognized upon
shipment of the software if collection of the resulting receivable is
probable, an executed agreement has been signed, the fee is fixed or
determinable and vendor-specific objective evidence exists to allocate a
portion of the total fee to any undelivered elements of the arrangement.
Such undelivered elements in these arrangements typically consist of
services. For sales made through distributors, revenue is recognized upon
shipment. Distributors have no right of return.
F-8
49
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Service Revenue -- Revenue from customer training, support and
consulting services is recognized as the services are performed. Support
revenue is recognized ratably over the term of the support contract. If
support or professional services are included in an arrangement that
includes a license agreement, amounts related to support or professional
services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not
sold separately, the price established by management having the relevant
authority. Arrangements which require significant modification or
customization of software are recognized under the percentage of completion
method.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provided guidance on the recognition, presentation and
disclosure of revenue in the financial statements. SAB No. 101 outlines basic
criteria that must be met to recognized revenue and provides guidance for
disclosure related to revenue recognition policies. The Company was required to
implement SAB No. 101 in the fourth quarter of the year ended December 31, 2000.
The provisions of SAB No. 101 did not have a material impact on the Company's
consolidated financial position or results of operations.
Income Taxes -- Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
Foreign Currency Transactions -- The functional currency of the Company's
foreign subsidiary is the British Pound Sterling. Accordingly, all monetary
assets and liabilities are translated at the current exchange rate at the end of
the year, nonmonetary assets and liabilities are translated at historical rates
and net sales and expenses are translated at average exchange rates in effect
during the period. Translation gains and losses, which are included in balance
sheet and in other comprehensive income (loss) in the accompanying consolidated
statements of changes in stockholders' equity, have not been significant.
Stock Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, no accounting recognition is given to employee stock options
granted with an exercise price equal to fair market value of the underlying
stock on the grant date. Upon exercise, the net proceeds and any related tax
benefit are credited to stockholders' equity.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- An
Interpretation of APB Opinion No. 25." FIN 44, effective July 1, 2000, clarifies
the application of APB No. 25 for matters including: the definition of an
employee for purposes of APB No. 25; the criteria for determining whether a plan
qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option or award; and the
accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN No. 44 did not have a material impact on the
Company's consolidated financial position or results of operations.
Net Loss per Common Share -- Basic net loss per common share excludes
dilution and is computed by dividing net loss by the weighted average number of
common shares outstanding for the period (excluding shares subject to
repurchase). Diluted net loss per common share was the same as basic net loss
per common share for all periods presented. This result is due to the exclusion
of all potentially dilutive securities, which are actually anti-dilutive because
of the Company's net losses.
Concentration of Credit Risk -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, short-term investments, and trade
F-9
50
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
receivables. The risk associated with cash and cash equivalents and short-term
investments is mitigated by using only high-quality financial institutions and
investing in high-grade debt securities The Company primarily sells its products
to companies in the United States and Europe. The Company does not require
collateral or other security to support accounts receivable. To reduce credit
risk, management performs ongoing credit evaluations of its customers' financial
condition. The Company maintains allowances for potential credit losses.
Financial Instruments -- The Company's financial instruments include cash
and equivalents, short-term investments, notes receivable from stockholders and
long-term debt. At December 31, 2000 and 1999, the fair value of these financial
instruments approximated their financial statement carrying amounts, because the
financial instruments are either short-term or reflect interest rates consistent
with market rates.
Significant Estimates -- The preparation of financial statements in
conformity with accounting principle as generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets, and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Certain Risks and Uncertainties -- The Company operates in the software
industry, and accordingly, can be affected by a variety of factors. For example,
management of the Company believes that changes in any of the following areas
could have a significant negative effect on the Company in terms of its future
financial position, results of operations and cash flows: ability to obtain
additional financing; regulatory changes; fundamental changes in the technology
underlying software products; market acceptance of the Company's products under
development; development of sales channels; loss of significant customers;
adverse changes in international market conditions; litigation or other claims
against the Company; the hiring, training and retention of key employees;
successful and timely completion of product development efforts; and new product
introductions by competitors.
We have incurred net losses each year since 1996 including losses of $16.7
million in 2000, $11.3 million in 1999, and $4.1 million in 1998. As of December
31, 2000, we had an accumulated deficit of $40.8 million. We believe our cash
and cash equivalents and short-term investments of $19.4 million are sufficient
to meet our anticipated cash needs for working capital and capital expenditures
through at least 2001. If cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to raise additional financing or
reduce the scope of our planned product development and marketing efforts.
Comprehensive Income -- The Company had no comprehensive income items,
other than net loss for the year ended December 31, 1998, a $10,000 unrealized
loss in the market value of short-term investments for 1999, and a $10,000
unrealized gain in the market value of short term investments along with a
$46,000 cumulative translation adjustment for 2000.
Segments of an Enterprise -- The Company currently operates in one
reportable segment and the chief operating decision maker is the Company's Chief
Executive Officer.
Other Recently Issued Accounting Standards -- In June 1998, the Financial
Relations Accounting Board ("FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement requires companies
to record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
the Company's fiscal year ending December 31, 2001. We have completed our
evaluation of the impact of adopting SFAS No. 133 and believe that the impact of
adopting the standard will not be material to our financial position, results of
operations or cash flows.
F-10
51
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Reclassifications -- Certain reclassifications have been made to the prior
year financial statement presentations to conform to the current year
presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Equipment................................................ $ 3,467 $ 2,291
Software................................................. 1,079 892
Leasehold improvements................................... 218 89
------- -------
4,764 3,272
Accumulated depreciation and amortization................ (2,987) (2,221)
------- -------
$ 1,777 $ 1,051
======= =======
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
DECEMBER 31,
----------------
2000 1999
------- -----
(IN THOUSANDS)
Equipment term loan....................................... $ 333 $ 600
Equipment financing facility.............................. 533 --
Capital lease obligations (see Note 4).................... 87 91
Other long-term obligations............................... 1,275 --
------- -----
2,228 691
Less current portion...................................... (1,296) (337)
------- -----
$ 932 $ 354
======= =====
In November 2000, the Company renewed its credit facilities with a bank.
Under the renewed facilities, the Company continues to have available a $5
million revolving line of credit facility available through October 31, 2001 and
a new $1 million equipment financing facility under which drawdowns are
available through April 31, 2001 in addition to its outstanding $800,000
equipment term loan.
As of December 31, 2000, the Company had no borrowings outstanding under
its renewed $5 million line of credit facility. Under this facility, any
outstanding borrowings will bear interest at either the bank's base rate (9.5%
as of December 31, 2000) or LIBOR plus 2.0 basis points for a maximum of two
LIBOR advances in $1 million minimum increments having 30, 60, or 90 day
maturities.
As of December 31, 2000, the Company had $533,000 outstanding under its new
$1 million equipment financing facility with the bank. Under this facility, all
borrowings outstanding on May 1, 2001 will automatically convert to a 30-month
term loan having equal monthly payments of principal and interest. Borrowings
under the equipment financing facility will bear interest at the bank's base
rate plus 0.50%.
As of December 31, 2000, the Company had $333,000 outstanding under its
$800,000 equipment term loan, which bears interest at 7.75%. The Company is
required to make equal principal payments of $22,000 per month plus interest on
the unpaid balance, payable in monthly installments through March 2002.
F-11
52
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The bank's renewed credit facilities require the Company, among other
things, to maintain a minimum tangible net worth of $10 million and a minimum
quick ratio (current assets not including inventory less current liabilities) of
2 to 1. As of both June 30, 2000 and September 30, 2000, the Company's tangible
net worth fell below the minimum tangible net worth ratio then in effect, and
the bank waived both of those previous events. As of December 31, 2000, the
Company was in compliance with its debt covenants. Borrowings under the
facilities are collateralized by substantially all of the Company's assets.
Other long-term obligations represent uncollaterialized
non-interest-bearing amounts payable for the acquisition of various purchased
intangibles that are generally due within two years.
As of December 31, 2000, annual maturities under the equipment financing
facility, the existing equipment term loan, and the other long-term obligations
are as follows:
FISCAL YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------------- --------------
2001...................................................... $1,254
2002...................................................... 549
2003...................................................... 338
------
Total............................................. $2,141
======
4. LEASE COMMITMENTS
Equipment with a net book value of $71,000 and nil at December 31, 2000 and
1999, respectively, (net of accumulated amortization of $694,000 and $692,000)
has been leased under capital leases.
The Company leases its principal facility under a noncancelable operating
lease expiring on June 30, 2002. Rent expense was approximately $965,000,
$953,000 and $337,000 in 2000, 1999 and 1998, respectively.
Future minimum payments under the Company's leases at December 31, 2000(a)
are:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
2001...................................................... $ 50 $1,411
2002...................................................... 27 775
2003...................................................... 23 384
2004...................................................... -- 223
2005...................................................... -- 75
---- ------
Total........................................... 100 $2,868
======
Amount representing interest.............................. (13)
----
Present value............................................. 87
Current portion........................................... (42)
----
Long-term portion......................................... $ 45
====
- ---------------
(a) The operating lease payment schedule above represents future minimum
payments for each of the years presented based on information available as
of February 28, 2001 as a result of the renegotiations of certain operating
leases by the Company between January 1, 2001 and February 28, 2001.
F-12
53
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
With the closing of the initial public offering of common stock in June
1999, all shares of the Company's outstanding convertible preferred stock were
converted to common stock on a share for share basis.
Common Stock
In February 1999, the Company entered into an agreement with a customer and
Series D preferred stockholder, whereby such customer was to perform development
work to achieve certain performance improvements related to the Company's
PowerTier product. In connection with this agreement, the Company allowed such
customer to purchase 90,300 shares of common stock at $1.65 per share in
February 1999, which was less than the deemed fair value for accounting
purposes. The Company has recorded a research and development expense of
$303,000 in 1999 for the difference between the deemed fair value and the stock
price of $1.65 per share.
1994 Stock Purchase Plan
Under the 1994 Stock Purchase Plan (the Plan), the Company could sell
common stock to employees of the Company at the fair market value as determined
by the Board of Directors. Sales are to be made pursuant to restricted stock
purchase agreements containing provisions established by the Board. No shares
were issued under the Plan in 2000, 1999 and 1998. The Company has the right to
repurchase these shares at the original issuance price upon termination of
employment; this right expires ratably over four years. During 2000, 1999 and
1998, the Company repurchased 5,782, 10,084 and 23,081 shares, respectively, at
prices ranging from $0.06 to $0.23 per share. At December 31, 2000, no shares
were subject to repurchase and no shares were available for future grant.
1997 Stock Plan
As of December 31, 2000, the Company has reserved 5,609,652 shares of
common stock for issuance, at the discretion of the Board of Directors, to
officers, directors, employees and consultants pursuant to its 1997 Stock Plan.
This reserved amount was increased automatically on January 1, 2001 under the
provisions of the Plan by 840,000 shares to 6,449,652 shares reserved. The Plan
also provides for an automatic annual increase on the first day of 2002, 2003,
2004 and 2005 equal to the lesser of 840,000 shares, 4.9% of the outstanding
common stock on the last day of the immediately preceding fiscal year, or such
lesser number as determined by the Board of Directors.
At December 31, 2000, 796,487 shares have been issued at $0.23 per share
pursuant to restricted stock purchase agreements in which the Company has a
right to repurchase these shares at original issuance price upon termination of
employment; this right expires ratably over four years. At December 31, 2000,
184,167 shares were subject to repurchase. No shares were repurchased in 1999,
1998 or 1997.
At December 31, 2000 4,138,158 shares are reserved for exercise of issued
and outstanding options, and 285,406 shares are available for future grant. The
shares available for future grant automatically increased by 840,000 shares on
January 1, 2001 to 1,125,406 shares.
Options granted under the 1997 Stock Plan generally vest over four years
and expire ten years from the date of grant. Certain options were issued to a
director in his capacity as a consultant in 1998 (See Note 8).
F-13
54
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Additional information with respect to options under the 1997 Stock Plan is
as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
---------- ------------
Outstanding, January 1, 1998
(1,208 exercisable at a weighted average exercise price of
$0.23)................................................. 410,375 $ 0.23
Granted (weighted average fair value of $2.49)............ 943,572 $ 0.54
Exercised................................................. (4,890) $ 0.23
Canceled.................................................. (134,860) $ 0.24
---------- ------
Outstanding, December 31, 1998
(112,258 exercisable at a weighted average exercise price
of $0.24).............................................. 1,214,197 $ 0.47
Granted (weighted average fair value of $4.14)............ 2,895,287 $11.39
Exercised................................................. (310,499) $ 0.60
Canceled.................................................. (555,510) $ 3.69
---------- ------
Outstanding, December 31, 1999
(279,720 exercisable at a weighted average exercise price
of $3.33).............................................. 3,243,475 $ 9.65
Granted (weighted average fair value of $10.95)........... 2,631,450 $13.48
Exercised................................................. (365,734) $ 7.02
Canceled.................................................. (1,656,439) $10.80
---------- ------
Outstanding, December 31, 2000
(992,433 exercisable at a weighted average exercise price
of $9.60).............................................. 3,852,752 $12.02
========== ======
Additional information regarding options outstanding as of December 31,
2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- ---------------- ----------- ---------------- -------------- ----------- --------
$ 0.01 to $ 0.50 308,452 7.28 $ 0.42 216,562 $ 0.42
$ 0.51 to $ 5.00 123,459 8.27 $ 1.78 57,560 $ 1.60
$ 5.01 to $10.00 781,779 9.51 $ 7.85 233,672 $ 9.39
$10.01 to $15.00 1,193,542 9.05 $13.17 342,584 $13.27
$15.01 to $20.00 1,276,020 8.55 $16.12 82,040 $16.40
$20.01 to $20.94 169,500 8.56 $20.94 60,015 $20.94
--------- ---- ------ ------- ------
$ 0.01 to
$20.94........ 3,852,752 8.79 $12.02 992,433 $ 9.60
========= ==== ====== ======= ======
1999 Directors' Stock Option Plan
The Company's 1999 Directors' Stock Option Plan (the "Directors' Plan")
became effective upon the closing of the Company's initial public offering in
June 1999. Under the Directors' Plan, a total of 500,000 shares of common stock
have been reserved for the grant of nonstatutory stock options to nonemployee
directors of the Company. Options granted under the Director's Plan shall be
immediately vested and expire in five years from the date of grant. No options
were granted under the Director's Plan during 1999. During 2000, 44,000 options
were granted under the Director's Plan at exercise prices ranging from $9.75 to
$22.50 and all were outstanding at December 31, 2000.
F-14
55
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1999 Employee Stock Purchase Plan
The Company's 1999 Employee Stock Purchase Plan (the "ESPP") became
effective upon the closing of the Company's initial public offering in June
1999. Under the ESPP, eligible employees may purchase common stock through
payroll deductions, which may not exceed 20% of any employee's compensation, nor
more than 2,500 shares in any one purchase period. A total of 600,000 shares of
common stock has been reserved for issuance under the ESPP. The ESPP allows for
an automatic annual increase on the first day of 2000, 2001, 2002, 2003 and 2004
equal to the lessor of 250,000 shares or 1% of outstanding common stock on the
last day of the immediately preceding fiscal year. As of December 31, 1999, no
shares were issued under the ESPP. During 2000, 104,077 shares were issued under
the ESPP at prices ranging from $9.35 to $14.56 per share and aggregate proceeds
of $1,037,000.
Deferred Stock Compensation
In connection with grants of certain stock options and issuance of common
stock in 2000, 1999, and, the Company recorded $85,000 (terminations of
$283,000), $45,000 (terminations of $90,000), and $2,266,000, respectively, for
the difference between the estimated fair value and the stock price as
determined by the Board of Directors on the date of grant/issuance. This amount
is being amortized to expense over the vesting period of the related stock/stock
options (generally four years). Amortization of deferred stock compensation for
the years ended December 31, 2000, 1999 and 1998 was $416,000, $971,000 and
$331,000, respectively.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions for options outstanding under
the 1997 Stock Plan: expected life, 24 months following vesting; risk free
interest rate, 5.1% in 2000, 5.4% in 1999 and 5.5% in 1998; volatility of 124%
for 2000, 50% for 1999 after the Company's June 1999 initial public offering of
common stock and none before that date, and none during 1998; and no dividends
during the expected term. The Company's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the awards granted in 1997 and after had been amortized
to expense over the vesting period of the awards, pro forma net loss (net of
amortization of deferred compensation expense already recorded for the years
ended December 31, 2000, 1999 and 1998, as discussed above) would have been
approximately $27.0 million ($1.40 per basic and diluted share) in 2000, $13.0
million ($0.99 per basic and diluted share) in 1999 and $4.4 million ($0.63 per
basic and diluted share) in 1998.
F-15
56
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
6. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Net loss (numerator), basic and diluted............. $(16,726) $(11,306) $(4,089)
Shares (denominator):
Weighted average common shares outstanding........ 19,621 13,605 7,644
Weighted average common shares outstanding subject
to repurchase.................................. (291) (514) (765)
-------- -------- -------
Shares used in computation, basic and diluted..... 19,330 13,091 6,879
======== ======== =======
Net loss per share, basic and diluted............... $ (0.87) $ (0.86) $ (0.59)
======== ======== =======
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following:
DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Convertible preferred stock.................... -- -- 6,992,184
Shares of common stock subject to repurchase... 184,167 398,066 629,864
Outstanding options............................ 3,852,752 3,243,475 1,214,197
Warrants....................................... -- -- 80,556
---------- ---------- ----------
Total................................ 4,036,919 3,641,541 8,916,801
========== ========== ==========
Weighted average exercise price of options..... $ 12.02 $ 9.65 $ 0.47
========== ========== ==========
Weighted average exercise price of warrants.... $ -- $ -- $ 0.90
========== ========== ==========
7. INCOME TAXES
The Company's deferred income tax assets are comprised of the following at
December 31:
2000 1999
-------- --------
(IN THOUSANDS)
Net deferred tax assets:
Net operating loss carryforwards.......................... $ 12,352 $ 7,941
Accruals deductible in different periods.................. 1,814 1,214
General business credits.................................. 1,478 1,582
Depreciation and amortization............................. 1,047 333
-------- --------
16,691 11,070
Valuation allowance....................................... (16,691) (11,070)
-------- --------
Total............................................. $ -- $ --
======== ========
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of the
F-16
57
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
benefits of its favorable tax attributes in future tax returns, as of December
31, 2000 and 1999, the Company has fully reserved its net deferred tax assets of
approximately $16.7 million and $11.1 million, respectively.
The Company's effective rate differs from the expected benefit at the
federal statutory tax rate at December 31 as follows:
2000 1999 1998
----- ----- -----
Federal statutory tax rate.......................... (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit................. (6.0) (6.0) (6.0)
Stock compensation expense.......................... 1.0 3.4 2.8
Other............................................... 0.4 0.3 0.3
Valuation allowance................................. 39.6 37.3 37.9
----- ----- -----
Effective tax rate.................................. --% --% --%
===== ===== =====
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 2000, the Company has net operating loss (NOL)
carryforwards of approximately $34.0 million and $7.8 million for federal and
state income tax purposes, respectively. The federal NOL carryforwards expire
through 2020, while the state NOL carryforwards expire through 2005. The net
operating loss carryforwards available for state tax purposes are substantially
less than for federal tax purposes, primarily because only 50% of state net
operating losses can be utilized to offset future state taxable income.
At December 31, 2000, the Company also has research and development credit
carryforwards of approximately $980,000 and $788,000 available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2015, while the state credit carryforward has no expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
8. RELATED PARTY TRANSACTIONS
During 1998, the Company recognized revenue of $168,000 and $1,450,000 from
a Series B and a Series C preferred stockholder, respectively. At December 31,
1998, the Company had deferred revenue of $30,000 and $642,000 with the same
Series B and Series C preferred stockholders, respectively. All of the deferred
revenue was recognized in 1999. At December 31, 1998, the Company had accounts
receivable of $101,000 from the Series B preferred stockholder.
During 1999, the Company paid $69,000 to a director for consulting
services. During 1998, the Company paid $18,000 to a director for consulting
services, and in 1998 paid $20,500 to another director for consulting services.
In July 1998, the Company granted a fully vested option to purchase up to 3,572
shares of common stock at $0.50 per share to a director in connection with
consulting services rendered. Compensation expense of $9,000 was recorded for
the difference between the exercise price and the deemed fair market value of
the common stock on the date of grant.
During 2000, the Company had insignificant transactions with related
parties.
See also Note 9 for information about significant revenues from common
stockholders.
F-17
58
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
9. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company is engaged in the development and marketing of transactional
application server software products and operates in one reportable segment
under SFAS 131.
Geographic Information
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) ASSETS
----------- ---------- ----------- ---------- ----------- ----------
(IN THOUSANDS)
United States................. $18,107 $1,632 $10,369 $1,004 $ 7,223 $673
Europe........................ 4,755 73 3,338 27 2,866 50
Rest of the world............. 2,415 72 736 20 71 --
------- ------ ------- ------ ------- ----
$25,277 $1,777 $14,443 $1,051 $10,160 $723
======= ====== ======= ====== ======= ====
- ---------------
(1) Revenues are broken out geographically by the ship-to location of the
customer.
Significant Customers
During 2000, one customer accounted for 16% of the Company's total
revenues. During 1999, one customer (a common stockholder) accounted for 13% of
the Company's total revenues. During 1998, one customer (a common stockholder)
accounted for 14% of total revenues. Additionally, during 1998, another customer
(also a common stockholder) accounted for 17% of total revenues.
At December 31, 2000, one customer accounted for 19% of accounts
receivable, and another customer accounted for 18% of accounts receivable. At
December 31, 1999, one customer accounted for 11% of accounts receivable.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 1% to 20% up to the maximum allowed under IRS rules). Company contributions
are discretionary; no such Company contributions have been made since inception
of this plan.
F-18
59
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
PAGE
----
Audited Consolidated Financial Statement Schedule:
Independent Auditors' Report.............................. S-2
Schedule II -- Consolidated Schedule of Valuation and
Qualifying Accounts for the years ended December 31,
2000, 1999 and 1998.................................... S-3
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
S-1
60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the consolidated financial statements of Persistence
Software, Inc. and subsidiary (the "Company") as of December 31, 2000 and 1999,
and for each of the three years in the period ended December 31, 2000, and have
issued our report thereon dated January 30, 2001, (February 28, 2001 as to the
table in Note 4). Our audits also included the consolidated financial statement
schedule of the Company listed in the Index at Item 14(a)(2). This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 30, 2001
S-2
61
SCHEDULE II
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING CHARGED TO COST DEDUCTIONS/ BALANCE AT
OF YEAR AND EXPENSES WRITE-OFFS END OF YEAR
---------- --------------- ----------- -----------
Year ended December 31, 1998 Allowance for
doubtful accounts............................ $ 75,000 $ -- $ 28,000 $ 47,000
======== ======== ======== ==========
Year ended December 31, 1999 Allowance for
doubtful accounts............................ $ 47,000 $467,000 $182,000 $ 332,000
======== ======== ======== ==========
Year ended December 31, 2000 Allowance for
doubtful accounts............................ $332,000 $915,000 $ 19,000 $1,228,000
======== ======== ======== ==========
S-3